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TUESDAY, NOVEMBER 24, 2009
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IRS May Cut 401(k) Contribution Limit

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(Newser) – Low inflation could force the IRS to decrease the amount workers can contribute to their 401(k) plans to $16,000, USA Today reports. It would mark the first time the government has ever lowered contribution limits. Though a spokesperson says it’s too early for speculation, the IRS may not have any choice. "A strict interpretation of the code could lead them to believe that's their only option," a consultant says.

Additional catch-up contribution limits for those 50 and over may also have to be reduced to $5,000 from $5,500. And negative inflation may mean that Social Security recipients won’t receive a cost-of-living adjustment for the first time since the adjustments were instituted in 1975. Lower contribution limits during the recession and the stock market's woes could prompt a strong public backlash, an analyst predicts.

Internal Revenue Service Commissioner Douglas Shulman testifies on Capitol Hill in Washington, Wednesday, April 1, 2009, before the House Small Business Committee.
Internal Revenue Service Commissioner Douglas Shulman testifies on Capitol Hill in Washington, Wednesday, April 1, 2009, before the House Small Business Committee.   (AP Photo/Manuel Balce Ceneta)
Rick Corley and his wife Jean pose for a photo in Moore, Okla. With their retirement savings badly depleted because of the stock market, the Corleys both applied for Social Security benefits.
Rick Corley and his wife Jean pose for a photo in Moore, Okla. With their retirement savings badly depleted because of the stock market, the Corleys both applied for Social Security benefits.   (AP Photo)
An Iraq War demonstrator gets arrested outside the Internal Revenue Service (IRS) in Washington, Wednesday, March 19, 2008, during a protest on the fifth anniversary of the war in Iraq.
An Iraq War demonstrator gets arrested outside the Internal Revenue Service (IRS) in Washington, Wednesday, March 19, 2008, during a protest on the fifth anniversary of the war in Iraq.   (AP Photo/Jose Luis Magana)
Dee Jollie, a resident of Greenspring retirement community, is pictured in Springfield, Va. Tuesday, Aug. 25, 2009.
Dee Jollie, a resident of Greenspring retirement community, is pictured in Springfield, Va. Tuesday, Aug. 25, 2009.   (AP Photo/Gerald Herbert)
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9 comments
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RobN
Aug 27, 09 12:48 PM CDT
What they ought to do is cut the limit out altogether and let people save as much as they can for retirement. If I want to live on less now so that I'm not dependant on social security later, that seems like something the government ought to encourage. Reply
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Robert_Dada
Aug 27, 09 12:51 PM CDT
Can't do that since contributions are tax deferred, they remove compensation that would otherwise be taxed now. Besides, only the affluent would be able to really take advantage of limit removals and they're already more financially secure.
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RobN
Aug 27, 09 1:36 PM CDT
I understand the tax deferral issue but since we constantly use tax policy to subsidize activities that society finds worthwhile, why not do the same with saving? It isn't just the affluent that could use this. You can only put in 15% of your income up to a certain limit. For a lot of couples this means that the higher earning partner can max out but that the lower earner cannot since 15% of the lower income will never reach the limit. Why not allow couples to take 15% of their combined income instead of treating them as individuals? We get taxed as a couple but can only save as individuals? I would still argue that since it is primarily the middle class who use the 401k, rich people aren't depending on this, that it would still be a good idea to encourage as many people as possible to prepare for a future that doesn't depend on a check from the govt.
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Robert_Dada
Aug 27, 09 2:29 PM CDT
401Ks do little for lower middle and lower income earners because the vast majority of their earnings goes towards their living expenses. Even if they can throw a small sum in, they'd never be able to reap the rewards of a capless system. The rich have enough already. And for those of us who can also afford it, not only can we max out our 401K's but also contribute to IRAs. Besides, there's also non-retirement fund investing. If you got the funds after you maxed out everything, just invest in other investment vehicles.
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Robert_Dada
Aug 27, 09 12:49 PM CDT
This is not news. It's always been known that beginning with 2010, contribution ceiling limits would be indexed to the inflation rate. This isn't bad news since inflation is low. Reply
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