Reduction in 401(k) limits possible

One of the good things to come from the current recession is that inflation has been virtually non-existent and we've even seen a reduction in the cost of living depending on the time frame measured. Through September 2008 inflation was just under 5% due to energy costs, but we've had deflation since March 2009. While this is good on the pocketbook, the IRS may be forced to reduce the maximum contribution from its current $16,500 (plus $5,500 for those over age 50) because the 401(k) law bases contribution limit increases on the Consumer Price Index's measure of inflation.

The law is a bit gray in this area, as this has never happened before. But with the average 401(k) plan balance down over 25% in 2008, a reduction in the contribution limit could hinder the ability to buy more shares at lower prices - cutting at the heart of dollar cost averaging.

A five-minute email to your representatives in Washington can help the opposition to this possibility.

Pitt, David. “401k contribution limits face potential fall.” Atlanta Journal Constitution, September 4, 2009.

Block, Sandra. “In 2010 IRS could cut 401(k) contribution limit to $16,000.” USA Today, August 28, 2009.