Potential Reductions in 401k Contribution Limits
 
First people saw their 401k’s become 201k’s as the market dropped precipitously in the fourth quarter of 2008 and the first quarter of 2009.  Now, just as the market is starting to recover (it recorded the best third quarter returns in history in the quarter ended September 30, 2009), and people want to increase their contributions to grow their accounts, the IRS may reduce contribution limits for 2010.

Why you may ask.  Because the limits for defined benefit and defined contribution plans are adjusted each year using an inflation based formula.  As a result of negative inflation in 2009, the contribution limits may not get the cost of living increase and, in fact, may be decreased.  Currently, employees may contribute up to $16,500 into their 401k plan, but that could be reduced by $500 to $16,000 in 2010.  Similarly, the maximum compensation eligible to receive company contributions may also be decreased by $5,000 from $245,000 to $240,000.

While nothing has been announced and the IRS has never lowered these limits, given the current economy and mounting federal deficits there is no telling what will happen.  All we can do is wait and hope for the best.