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Deflation May Impact Your 401k Contribution Amount

A decline in consumer prices this quarter – i.e., deflation – could result in 401(k) contribution limits being lowered next year for the first time since Congress imposed the limits in 1986.

Contribution limits for 401(k) plans are adjusted annually, based on a complicated formula tied to the Consumer Price Index for the preceding third quarter. Thus, this quarter's CPI will be used to calculate the 2010 contribution limits.

But the CPI was flat in July and, depending on how it performs in August and September, there's a chance the formula could produce lower contribution limits for 2010.

It would then be up to the Internal Revenue Service to decide whether to keep contribution limits at 2009 levels or to lower them. A decision is due Oct. 15.

In 2009, most workers can contribute a maximum $16,500 to a 401(k); those who are 50 and older may put away an additional $5,500 in so-called catch-up contributions. Contributions are deducted from your paycheck before taxes are assessed, lowering your taxable income.

If the IRS does lower the contribution limit, it would fall by $500 to $16,000, assuming inflation remains at recent levels.

The limit on catch-up contributions would fall to $5,000.

Courtesy of DallasNews.com

Deflation???...I went grocery shopping yesterday-my food bill was sky high!...Wise Owl

Posted on Saturday, August 29 by Registered CommenterWise Owl | Comments Off