Every year the IRS decides whether or not to raise the annual contribution limit for 401(k) retirement plans. Its calculations are based on the official cost-of-living rates.  These limits also apply to other retirement savings plans such as 403(b)s.

You can set aside pre-tax money if your employer sponsors one of these retirement savings accounts, but the government caps how much each person can shelter from taxes.

For the first time since 2009, the IRS has raised the annual salary reduction limits on 401(k) and 403(b) plans. The catch-up amount for those aged 50 and over has stayed the same.

All annual contribution limits are applied on a calendar year basis. Any reference here to a 401(k) plan also applies to a 403(b) plan.

2012 Contribution Limit

The 401(k) contribution limit has been raised a total of $500 for 2012. You can take advantage of the additional age-50 contribution if you turn 50 by the end of calendar year 2012. You’re eligible for the extra contribution amount if you were born on December 31, 1962 or earlier.

Contact your benefits administrator if you want to maximize your contribution for 2012. Depending on how your employer administers the plan, you might have to complete a paper form or make your election online. You might also be limited to a certain number of changes per plan year. So make sure you understand the rules.

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Additional Limitations

While the annual contribution limit can theoretically be as high as shown in the above chart, there are additional rules for 401(k) retirement savings plans that might lower the amounts. Intended to prevent higher paid employees from benefiting disproportionately from the tax savings associated with 401(k) contributions, these rules are applied based on the circumstances at each employer.

If a company sponsors a 401(k) retirement savings plan with a matching feature (e.g., the employer gives a contribution to the plan based how much the employee contributes), it must test its population every year. Based on the participation rates at different salary levels, the employer might be required to cap how much its highest paid employees can contribute.

If you are affected by these testing rules, your employer has likely already notified you. But if you are new to the plan – or had never contributed at a high rate before – double-check with the administrator of your retirement savings plan. Your 401(k) annual contribution limit might be lower than otherwise allowed.