Employees can elect to make voluntary contributions from their salary to certain retirement plans. The type of plan may depend on your employer. Many employers maintain cash or deferred arrangements — 401(k) plans — as part of their defined contribution retirement plan. State and local governments can maintain “457” eligible deferred compensation plans. Nonprofit organizations can provide a 403(b) tax-sheltered annuity. And, of course, taxpayers can contribute to an individual retirement account (IRA).

These plans all maintain separate accounts for their participants. All of these plans are subject to annual limits on voluntary employee contributions, which apply per participant, not per plan. The normal limit for both 2009 and 2010 is $16,500 or the employee’s compensation, if less. Employer limits may reduce the $16,500 amount.

Contributions to a 401(k), 403(b) or 457 plans must be made by the end of the calendar year to apply against that year’s limit. Generally, employees can change the amount or rate of salary reduction contributions by making an election at any time during the year.

Catch-up contributions

For most plans, the limit increases in the year that the employee will turn 50. The increased limit applies even if the employee terminates employment or dies before actually turning 50. The increased limits are known as “catch-up” contributions. Catch-up contributions are additional elective deferrals made by eligible participants above the normal applicable limit. However, a catch-up contribution does not mean that the employee can take an unused limit from an earlier year and catch-up; the catch-up contribution is based on the higher limits allowed to older individuals.

A plan does not have to allow catch-up contributions. There are statutory limits on catch-up contributions, adjusted for inflation each year. For 401(k), 403(b), and 457 plans, the maximum catch-up contribution for both 2009 and 2010 is $5,500. The employer cannot reduce the catch-up limit. Adding the catch-up limit produces a potential overall limit of $22,000 on voluntary contributions by a 50-year old employee. Excess contributions have to be included in income (if not withdrawn in time), plus they are subject to a 10 percent penalty.


For an IRA, there is a separate regular limit of $5,000 for 2009, up to the amount of the individual’s compensation, and a separate catch-up limit of $1,000 for an individual who turns 50 by the end of the year. An IRA contribution can be made by the due date of the year’s tax return in the following year (not including extensions). So the deadline is April 15 of the following year. There also are penalties for an excess contribution to an IRA.