In the tax bill passed in the summer of 2001, several key 401(k)-plan contribution limits were changed.

For 2002, the maximum pre-tax contribution a participant can make is $11,000 -- subject to the 100-percent-of-pay limitation and special non-discrimination tests described below. The limit will rise by $1,000 a year until 2006, when it will hit $15,000. The pre-tax limit for 2001 was $10,500 and the percent-of-pay limit was 25 percent. The IRS imposes these limits because Uncle Sam loses tax revenue for every dollar you contribute to your 401(k). If your plan allows you to make after-tax contributions, they are not included in this limit.

The percentage-of-pay limit stipulates that the maximum amount that can be accumulated in any of your tax-qualified defined contribution plans -- 401(k), thrift, profit-sharing, ESOP, and money purchase -- is limited to 100 percent of your gross pay or $40,000, whichever is less, in 2002. Every dollar contributed (both employee and employer) counts toward this limit, including after-tax contributions. (In 2001, this limit was $35,000 or 25 percent of pay.)

Finally, there are special non-discrimination rules to prevent highly compensated employees (HCE) from being able to save substantially more than lower paid employees. If you earned $85,000 or more in 2001, or owned more than 5 percent of the company, additional contribution caps may apply for you in 2002, because the HCE designation is based on your previous year's salary. For 2002, the income limit for highly compensated employees is $90,000. What does this mean? If you earn $90,000 or more in 2002, your contributions to a 401(k) plan could be limited in 2003.

If you work for more than one employer during the year, and contribute to more than one 401(k) or 403(b) plan, the total amount of your contributions to all plans combined during the calendar year cannot exceed these federal limits.

Each company decides the contribution limit for its own plan, within the IRS guidelines of an $11,000 annual individual contribution limit for 2002, a $40,000 maximum combined employer and employee contribution limit and the 100-percent-of-pay limitation. Plan limits have generally fallen between 1 percent and 20 percent of a participant's salary, but you should check with your benefits office or plan administrator for details about your plan's limits.

Setting the contribution limit is no easy task. On one hand, the company wants to help its employees reach their retirement goals and maximize participation in the plan. But on the other hand, the company must be sure that its plan complies with several government-imposed limitations and non-discrimination tests. If even one employee exceeds the government-imposed limits, or if the plan doesn't pass the non-discrimination tests, the plan could be disqualified (meaning it would no longer be able to accept pre-tax contributions).

Needless to say, having your plan lose its qualified status is not a good thing. Most employers are careful and conscientious when setting plan limits.

This depends on the rules of your particular plan. There is no federally imposed minimum contribution to a 401(k), but many plans require participants to contribute at least 1-2 percent of their salary. This helps offset administration costs.

The definition of "total compensation" depends on your 401(k) plan's rules. When a plan is established, the employer can choose to include all compensation -- overtime, bonuses, commissions, etc. -- or only a portion, such as base pay, when determining total compensation. The specifics for your company's plan can most likely be found in the Summary Plan Description document (if you can't find yours, your human resources representative should have a copy on hand).

They could be. The federal government wants to make sure that everyone has a fair chance to benefit from 401(k) plans. Since it would be unfair to allow people who earn high salaries to save substantially more than their lower-paid co-workers could, there are special discrimination tests that plans must pass. If a plan fails this test, the "highly compensated" participants in that plan will likely see their contributions capped, or even refunded (at least in part).

Any highly compensated employee (HCE) contribution limits for a given year are based on your salary for the previous year. Thus, you are considered an HCE in terms of your 401(k) contributions for 2002 if your salary in 2001 was more than $85,000 or if you owned more than 5 percent of your company. (You will be considered a highly compensated employee for 2003 if your salary in 2002 is more than $90,000 or if you own more than 5 percent of your company.)

Additionally, current law forbids employees from making 401(k) contributions or receiving matching contributions for any compensation over $200,000.

For 2002, you may not make 401(k) contributions or receive matching contributions for any compensation over $200,000, even if you earn more than that. The limit in 2001 was $170,000.

To better understand how this limit works, try taking the following quiz.

If you earn $220,000 in 2002 and contribute 5 percent of your salary to your 401(k), how much will your annual contribution be?

The answer: $10,000. Even though 5 percent of $220,000 is $11,000, the law says you can only make 401(k) contributions on the first $200,000 of your salary. Therefore, your contribution amount is 5 percent of $200,000, or $10,000.

No. There is no law requiring employers to contribute to the plan. However, many employers do choose to make contributions because:

• it is an added incentive for employee participation.
• it is an attractive benefit and, thus, an effective tool to hire and keep top-notch employees.
• helping to ensure that its retirees live comfortably enhances the company's image among shareholders, customers, and current and prospective employees.
• company contributions are tax deductible.

Although there is no law requiring employers to contribute to the plan, many employers choose to make contributions because:

• it is an added incentive for employee participation.
• it is an attractive benefit and, thus, an effective tool to hire and keep top-notch employees.
• helping to ensure that the company's retirees live comfortably enhances the company's image among shareholders, customers, and current and prospective employees.
• company contributions are tax deductible.

Department of Labor (DOL) regulations apply to when your contributions must be deposited into the plan account. There aren't any regulations governing how soon the money must be invested in the specific funds you have selected.

According to the DOL, employers are supposed to deposit employee contributions into the plan as soon as they are able to determine the amount that should be deposited. This vague definition gives employers some latitude.

A few years ago, the DOL updated its regulations to specify that employers are definitely in trouble if the money isn't deposited prior to the 15th business day of the month after the contributions are deducted. But, employers could still run afoul of auditors with this method.

To be safe, employers should deposit employee contributions within a day or two after they are deducted.

Yes, but your ability to make a tax-deductible IRA contribution depends on three factors:

• Your filing status
• Your adjusted gross income (AGI), and modified adjusted gross income (MAGI)
• Whether it is a Roth IRA or a traditional IRA.

In the chart below are the year 2002 income break-points for full, partial and nondeductible contributions to a traditional IRA. (These are each $1,000 higher than the 2001 limits.)

Traditional IRA income break points for 2002 IRA contribution is fully deductible if MAGI is: IRA contribution is partially deductible if MAGI is: IRA contribution is not deductible if MAGI is: Single, covered by employer-sponsored retirement plan Less than $34,000 $34,000 - $43,999 $44,000 or more Single, not covered by employer-sponsored retirement plan OR married filing separately*, neither spouse covered by employer-sponsored retirement plan Contributions fully deductible at all income levels Contributions fully deductible at all income levels Contributions fully deductible at all income levels Married filing jointly, both covered by employer-sponsored plan Less than $54,000 $54,000 - $63,999 $64,000 or more Married filing jointly, one covered by an employer-sponsored retirement plan, one not: Contribution of covered spouse Less than $54,000 $54,000 - $63,999 $64,000 or more Married filing jointly, one covered by an employer-sponsored retirement plan, one not: contribution of non-covered spouse Less than $150,000 $150,000-$159,999 $160,000 or more Married filing separately**, if either spouse is covered by an employer-sponsored retirement plan $0 Between $0 and $10,000 $10,000 or more

Notes:

*You are entitled to the full deduction if you did not live with your spouse at any time during the year.

**If you did not live with your spouse at any time during the year, your filing status is considered, for this purpose, as single (therefore your IRA deduction is determined by the "single" criteria).

To illustrate how to interpret the chart, let's assume that you are single and covered by an employer-sponsored retirement plan. If your MAGI is less than $34,000 your contribution is fully deductible ($3,000 maximum). If your MAGI is $34,000 or more, up to $43,999, the amount you may deduct is reduced incrementally. If your MAGI is $44,000, or more, you may not make a deductible contribution for 2002, but you may make a nondeductible contribution of up to $3,000 in 2002.

For your 2001 tax return, the MAGI limits are $1,000 less for single, covered by an employer-sponsored retirement plan ($33,000 to $42,999); married filing jointly, both covered by an employer-sponsored plan ($53,000 to $62,999); and married filing jointly, one spouse covered by an employer-sponsored retirement plan ($53,000 to $62,999).

If your contribution is nondeductible because of MAGI limitations, you may consider contributing to a Roth IRA. Roth IRA contributions are always nondeductible. However, there are separate MAGI limitations for making a Roth contribution.

If you are a single filer in 2002 and earn less than $95,000 or are married filing jointly and earn less than $150,000, you can make a full Roth IRA contribution of $3,000. If you are a single filer in 2002 and earn more than $110,000 or are married filing jointly and earn more than $160,000, you will not be eligible to contribute to a Roth IRA at all. If you earn between $95,000 and $109,999 for single filers; $150,000 to $159,999 for Married Filing Joint and Head of Household; and between $0 to $10,000 for Married Filing Separate, your maximum allowable contribution will be less than $3,000 and will decline as your salary increases. These income limits are the same for your 2001 tax return. The maximum annual IRA contribution limit was $2,000 in 2001.

For purposes of our chart, AGI is your gross income less any traditional IRA or other deductions. MAGI is your adjusted gross income without taking into consideration the tax deduction for a traditional IRA. In other words, it is your gross income less all non-IRA deductions.

That is up to you. When you enroll in a 401(k) plan, one of the things you have to decide is how you want to invest your contributions. Your plan sponsor will give you a choice of options in which you can invest. You can choose to put your entire contribution in one option or divide it among several.

Although there is no minimum number of investment options a plan sponsor is required to provide, most plans have at least three choices. These often include money market funds, corporate bond funds, growth stock funds, index funds, international funds and company stock. The options available to you will depend on your particular plan.

Above all, you should keep in mind that planning for your retirement is a process, not an event. mPower, the publisher of this site and a registered investment advisor, generally recommends that participants rebalance their 401(k) allocations every quarter in order to stay on track. Even if your personal or financial situation hasn't changed, two other factors certainly will have: 1) the time you have left until retirement will have grown shorter; and 2) if your most aggressive investments are growing faster than the others, they will comprise a larger percentage of your account.

If your company does not yet offer investment advice as part of its 401(k) plan, your human resources or benefits representative can most likely provide you with educational materials to help with your decision.

Yes. But how often you can change the amount of your contribution depends on the rules of your company's plan. Generally, plans allow for monthly, quarterly, semi-annual or annual changes. You may also have the option of suspending your contributions completely -- but you may not be able to resume them until the next enrollment date. Check with your human resources or benefits representative regarding the rules for your company's plan.

Perhaps the best way to answer this question is to look at the following comparison between pre- and post-tax 401(k) contributions. By the way, not all employers permit after-tax contributions to their 401(k) plan. Check your Summary Plan Description to find out if after-tax contributions are allowed.

Pre-tax Contributions:

Both the contributions you make to your account and the investment gain continue to grow tax-free until you withdraw money from your account at retirement.

As you take money out of your 401(k), you pay taxes only on the amount you withdraw (so that at retirement, taxes don't come due on your entire account balance at once).

Because your 401(k) contribution is deducted from your compensation before taxes are calculated, your taxable income is lower, so you pay less income tax.

If you withdraw money from your 401(k) account before age 59ý you will generally have to pay a penalty. The penalty will not apply in the cases of a qualified hardship as defined by the IRS, if you take early retirement starting in the year you turn 55, or if prior to turning 55, you take withdrawals based on a series of equal periodic payments as defined by the IRS.

Post-tax Contributions:

Because post-tax contributions are made with money you've already paid taxes on, only the investment's gain or income (i.e. interest and dividends) -- and not your contributions -- enjoy the benefit of tax-deferred growth.

When you withdraw post-tax 401(k) funds you only pay taxes on the gain (interest or dividends) your investment has earned. As with pre-tax contributions, taxes are due only when you take money out of your account.

Post-tax contributions are not tax-deductible, so you don't get a tax break for making them.

Depending on your plan's rules, you may be able to withdraw your post-tax contributions at any time without incurring a penalty. However, because the gain you earn on your post-tax 401(k) investment is tax-deferred, you must pay income tax on that amount when you withdraw your money. The gain is also subject to an early withdrawal penalty if withdrawn before age 59ý. The penalty will not apply in the cases of a qualified hardship as defined by the IRS, if you take early retirement starting in the year you turn 55, or if prior to turning 55, you take withdrawals based on a series of equal periodic payments as defined by the IRS.

Now, considering that the best tax break and the greatest opportunity for taking advantage of tax-deferred compounding come with pre-tax 401(k) contributions, why would anyone consider making post-tax contributions?

Here are some possible scenarios:

• If you are already making the maximum pre-tax 401(k) contribution allowed and really want to contribute more (to get the benefit of tax-deferred investment growth).
• If your employer matches both pre-tax and post-tax contributions, and you are fully vested for matching contributions, you might choose to maximize the employer match by making the maximum allowable pre-tax contribution and making post-tax contributions as well.
• If you are committed to saving money, but aren't sure you'll be able to leave your money invested until retirement, you might make after-tax contributions because you will be able to withdraw them without penalty before age 59ý. A person considering this idea needs to remember that the gain earned on the investment is subject to an early withdrawal penalty if taken out before age 59ý. Also, income tax on the investment gain is due at the time of withdrawal.

The 401(k) is an investment vehicle for retirement. If retirement is not the goal, there is probably a more appropriate vehicle for post-tax investment dollars.

There is no legal requirement for companies to contribute to a 401(k) plan. Many companies do choose to contribute because it helps boost employee participation in the plan and it's a competitive advantage for attracting and keeping valuable employees.

Many employers commit to matching a percentage of an employee's contribution. Generally speaking, the most common match rate is 50 cents on the dollar, up to 6 percent of an employee's salary. But when comparing your company's benefits with those of other companies, you should remember that there are other ways an employer can contribute to a 401(k) plan in addition to matching contributions. For example, the employer may choose to make a discretionary "profit sharing" contribution based on company profits. Other employers may "match" employee contributions in the form of company stock, instead of cash.

To make a fair comparison, you should also consider all other retirement benefits an employer offers (such as pension, profit-sharing or ESOP) outside the 401(k).

One informative source for comparative 401(k) plan information is the "Annual Survey of Profit Sharing and 401(k) Plans" published by the Profit Sharing/401(k) Council of America (PSCA). PSCA can be reached at (312)-441-8550 or www.psca.org.

It is up to employers to decide how they will match employee contributions, if they do at all. Each 401(k) plan is different, and the rules are explained in what is called the Summary Plan Description.

You can get a copy of your plan's Summary Plan Description from your human resources or benefits representative. In this document there should be a definition of "compensation" which describes the types of pay that the employer will match. The most common types are salary and overtime, but the definition could also include commissions.

You should raise any questions relating to your plan with the human resources or benefits representative at your company.

Each 401(k) plan has its own rules regarding the timing of employer contributions. Some employers make contributions every pay period, while others only make them once a year. You should check the Summary Plan Description, available from your human resources or benefits representative, to see what rules govern your plan.

Generally, employer contributions must be made within the tax-filing period for the calendar year in question. So an employer would have until at least April 15 of any given year to make the contribution for the previous year (or possibly longer, if the employer files for an extension). If the employer's contributions are discretionary (linked to company performance) they are generally deposited only after the company's performance for the previous year is assessed.

You should notify the benefits departments of both employers as soon as possible, so they can take the necessary steps to correct the error. If you do not get the excess amount refunded to you before April 15 of the year following the calendar year in which you paid too much, you will have to pay a 10 percent penalty on the amount, as well as federal, state and local taxes.

For 2002, the maximum amount you can contribute before taxes to your 401(k) (or 401(k)s, if you work for more than one employer during the year) is $11,000. This limit was $10,500 in 2001.

In 2001, Congress passed laws allowing 401(k) plan participants who are over the age of 50 to make what are known as catch-up contributions. The law permitting catch-up contributions will take effect in 2002, but your ability to make these contributions rests on when your employer amends its plan document to permit them. Check with your benefits department to find out when and/or if your plan will permit catch-up contributions.

The maximum catch-up contribution amount will start at $1,000 in 2002 and increase by $1,000 a year until reaching $5,000 in 2006. Further increases, in $500 increments, will be indexed to inflation.

Catch-up contributions will be allowed on top of your plan's current limit. That means for 2002, you may be able to contribute a maximum of $12,000 -- the new federal 401(k) limit of $11,000 and the $1,000 catch-up limit.

If your plan restricts your annual contributions to an amount less than the maximum federal limit, you should still be able to make a full catch-up contribution.

Unfortunately, catch-up contributions may only be available for a limited time. Unless the law permitting the catch-up contributions is extended, they will expire in 2010.

Workers over age 50 are eligible to make catch-up contributions.

The law permitting catch-up contributions will take effect in 2002, but your ability to make these contributions rests on when your employer amends its plan document to permit them. Check with your benefits department to find out when and/or if your plan will permit catch-up contributions.

It depends on your employer. The new law doesn't require employers to match catch-up contributions, but they may if they want to.

The maximum pre-tax contribution limit for 401(k) plans for the 2002 tax year is $11,000. The limit in 2001 was $10,500.

You may want to check with the Profit Sharing/401(k) Council of America (PSCA). It is a non-profit group representing 401(k) plans. Every year the PSCA conducts an annual survey of profit-sharing and 401(k) plans. You can reach the PSCA in Chicago at 312-441-8550 or on the web at www.psca.org.

The Employee Benefit Research Institute (EBRI), a nonprofit, non-partisan research group, also collects information about 401(k) plans. EBRI can be reached at 202-659-0670 or www.ebri.org.