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Chapter 2. The Rules: Understanding Your... > Common Features of 401(k) Plans - Pg. 17

The Rules: Understanding Your 401(k) 17 Contribution Rate Also known as deferral percentage or savings rate, this term is simply the amount of money that you contribute to your 401(k) account, either on a pre-tax or an after-tax basis. (See Chapter 6, "Saving Pre-Tax or After-Tax--Does It Really Matter?" for more on pre-tax vs. after-tax contribu- tions.) Your contributions will be deducted from your paycheck every pay period. For example, if you gross $1,000 per week and you've selected a 10 percent contribution rate, you're putting $100 a week ($1,000 × 10 percent = $100) into your 401(k) account. Most companies show the amount that you contributed on your paycheck. The most that you can contribute on a pre-tax basis to a 401(k) in 2001 is $10,500. (This amount changes each year with inflation, but only in $500 increments.) However, most employers limit your contributions before you ever reach this amount, to a certain percentage of gross pay such as 12 or 20 percent. You're probably thinking, "This is crazy! Why can't I contribute more if I want to?" The answer is somewhat complicated, so we'll explore that question later in this chapter. Our Advice Contribution limits increase beginning in 2002 for almost all retirement plans (see Chapter 1). For example, beginning in 2002, you can contribute $11,000 of pre-tax money; after your employer's match, you may be able to contribute up to another $29,000 after taxes. Employees age 50 and older can throw in an extra $1,000 pre-tax as well. Most employers will let you change your contribution rate on a daily, monthly, or quarterly basis. You can do this via an automated system, such as telephone or computer. Some may even accept paper. You remember paper, don't you? The big question that you should be asking yourself is, "How much should I be contributing?" Re- member, a 401(k) plan is a means to an end--the end being retirement or financial independence, whichever comes first. We'll explore this very important question in Chapter 5, "Developing Your Retirement Plan." Company Match This is the amount that your employer deposits into your account. Once you are eligible to participate in the 401(k), you'll soon be eligible to receive a match. According to the Employee Benefits Re- search Institute's 2000 "Survey of Defined Contribution Plans," about 84 percent of companies that offer 401(k) plans match their employees' contributions at some percentage. The most common match is 50¢ on each dollar that you contribute, up to 6 percent of your pay. Our Advice