Contribution Limits for 401(k)s Hold the Line for 2010

(MoneyWatch)  For all the belt-tightening the economic slump has caused, at least it hasn't undercut how much Americans can contribute to their 401(k) retirement savings.

Contribution limits for 401(k)s are linked to inflation, and many financial advisors feared the IRS would cut the maximum for 2010 due to the Consumer Price Index declining in the recent recalculation period. The Labor Department said Thursday the limit will remain at $16,500 next year -- with an additional $5,500 for those over 50 -- after Treasury officials determined the law doesn't mandate a limit reduction.

If the recession has taken a toll on your 401(k) account, you're not alone. Many Americans have reduced or stopped their contributions, for instance, after a spouse's job loss or have withdrawn funds despite tax levies and penalties.

Yet most of us have persevered in maintaining our retirement-savings rates, according to a survey released today by financial-services firm ING of 1,000 participants in 401(k)s and similar 403(b) and 457 plans for non-profit, health-care, education and government employees. ING said that since the fall of 2008:

• Nearly 40% joined their employers' plans or boosted contributions, vs. less than 30% who lowered or halted contributions;
• Just over one-third of participants reallocated their funds into more conservative investments, and yet 19% adopted a more aggressive strategy;
• Only one in 20 participants reported taking a loan against their 401(k) account, while 6% reported taking a hardship withdrawal.

For the remainder of this year, if you stopped your 401(k) deductions due to financial anxiety or weren't contributing at all, consider "catch-up" contributions for the final two months of 2009 to at least put away enough to qualify for employer matching funds. Otherwise, you're sacrificing free money in the near term, along with retirement savings in the long term.

As for 2010, if the maximum contribution is beyond your reach, still "max out" as much as you can. If you do lose your job sometime next year, you will be able to take a hardship withdrawal without any penalty. You'll have to pay income taxes on the withdrawals - as you would have if you didn't put that amount into your 401(k) - and the tax bite might actually be slighter due to lower total income if you're out of work for an extended period.