Workers contributing to their 401ks will be happy to know that their contribution limit won't change this year. Typically, the contribution limit adjusts to the conditions of the economy. Since the economy is in a deflated state, economists thought the IRS might lower the limit for 2010. However, it appears that the limit will sit still be at $16,500 for the year.
This is not the first time that the limit has not adjusted in one direction on the other - from 2007 to 2008, the limit was unchanged as well. However, since the limit was calculated based on a comparison of the cost of living index in the quarter ending September 30, 2009, to that of the same quarter in 2008 - and that time period marked the beginning of the worst financial crisis since the Great Depression - everyone expected the contribution limit to decrease.
So how does the contribution limit "unchanged" affect you?
- Plan Remains Unchanged - If you were already contributing the maximum $16,500 then you can leave your plan unchanged for next year.
- Better Purchasing Power - Since the cost of living decreased, your purchasing power is better in today's dollar.
However, experts say not to get too excited about these couple of perks. Ultimately, inflation will return and when it does, the $16,500 won't mean as much, especially for those near retirement. For those who are close to retiring, experts suggest maybe deferring retirement for a few years, or even investing in a Roth IRA that would tax you now but allow for tax-free withdrawals down the line.
