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Greetings, Henry, and welcome to Fooldom.

<<What are the 1998 limits on tax deductible contributions?

Doesn't the individual 401K contribution limit get bumped to $10K in 1998 since it wasn't adjusted for in 1997? Also, I recall reading somewhere a few years back that the total limit (individual 401K contribution, employer match, section 125 deductions, etc.) was 25% of gross income. Is this still true? (Or was it ever true?) >>

The overall 1998 dollar limit on a 401k elective (i.e., pre-tax) contribution by an employee has not yet been established. This year it is $9,500. Because it changes in $500 increments when the cumulative effect of inflation causes the limit to exceed the next higher $500, we can expect it to be raised from the current $9,500 to $10K in 1998. We'll know for sure when it's announced by the IRS.

Under Section 415 of the IRC, total contributions to a defined contribution plan are limited to a maximum of 25% of compensation or $30K, whichever is less. (Remember - the total dollar limit to a 401k is $9.5K regardless.) The rub comes in when defining pay for this purpose. This year, the 25% is applied against pay AFTER the employee's deferral, the employer's match, and any other deferrals like a Section 125 plan have been deducted from the employee's gross compensation. In effect, it is 25% of taxable - not gross - compensation. This caused many folks to be incapable of reaching the $9.5K annual limit, particularly those who used medical premiums and child care deferrals.. Next year the computation will be against gross compensation, so the potential $10K limit will be reached by far more than can do it this year. Next year you'll say "I make $50,000. What's 25% of that? Subtract from that amount my employer's contribution to the 401k on my behalf. Is the balance $10K or more? If yes, I can contribute no more than $10K. Is the balance less than $10K? If yes, that's the maximum I can contribute to the 401k this year."

Sometimes Congress can do something that makes sense.


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