Next year you might not be able to contribute as much to your 401(k).
For 2009 workers can contribute up to $16,500 to their plans, plus an additional $5,500 if they're 50 or older. But next year, the Internal Revenue Service may drop it to $16,000, and catch-up contributions could be reduced to $5,000, marking the first time the IRS has ever reduced contribution amounts, according to USA Today.
The reason why is because of low inflation rates. Contribution limits are set each year based on a formula that takes inflation into consideration.
"If recent inflation patterns continue into September, it's possible there will be a decrease in the statutory limits on qualified retirement-plan contributions and benefits for 2010," according to a report released by consulting firm Mercer this week.
Low inflation also may have a negative impact on social security as recipients might not get a cost-of-living adjustment. USA Today reports that this would be the first time seniors don't get a cost-of-living adjusment since the adjustments were adopted in 1975.
The IRS is slated to announce the adjustments in October, unless Congress steps in.
"A strict interpretation of the code could lead [the IRS] to believe [lowering the 401(k) contribution limits is] their only option," Bill McClain, senior consultant for Mercer, told USA Today.
But lowering the 401(k) contribution limit might be a moot point, according to Money.com's Carla Fried, who says Americans don't do enough to save as it is.
"The unfortunate reality is that even if the limits were reduced, it wouldn’t have much impact on Americans retirement savings. According to a Financial Engines survey of more than 550,000 401(k) accounts, only 7 percent of participants came within $500 of contributing the maximum allowed by the IRS or their plan limit. So for 93 percent of Americans this is a bit of a non-issue. (The fact that 93 percent of Americans should be saving more is an entirely different topic.)"
Others believe that what's more important is that the government should aim to send the right message in this economic climate.
"I'm not sure that a decrease in the statutory limits is a good idea in this economic environment," Richard Krasney of RJK Wealth Management told Fox Business. "The government should be rolling out more incentives for people to make contributions to retirement plans, not reducing the incentives."
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