401K Contributions Will Be axed In 2010

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The Internal Revenue Service has announced plans to cut back 401K contributions in 2010.  Millions of Americans save their money for retirement in these plans and the implications of reducing allowable contributions is far ranging.

The situation, however, is not really the fault of the Internal Revenue Service.  The rates set for allowable contributions are based on equations involving inflation.  Due to the fact that we are seeing a depreciation of value in almost everything, 2009 was a year of deflation.  401 K plans themselves have lost an average value of 25%.  It’s been a tough year and, apparently, we are going to suffer for it in 2010.

The maximum contribution in 2009 is $16, 500, with an allowance of an additional $5500 for those over 50 years of age.  The Internal Revenue Service has not yet officially set the limits for 2010, but computations point to a drop to about $16,000 maximum, with an allowance of only $5000 for those over 50 years old. This will be the first time, ever, that contribution rates are set to decrease rather than increase.

The Internal Revenue Service will no doubt take heat for this, but, in actuality, the agency’s hands are tied.  The equations that set forth the limits are law and only an act of Congress can change them.

At a time in history where our country faces negative savings rates and a loss of value in everything we own, Congress should not sit idly by while some mathematics become the next thing to wallop the American economy.  The U.S. lawmakers need to change this equation so that contributions can continue at their current rate or, better yet, increase.

Government has recently done some good things for taxpayers through the stimulus and recovery acts.  It is unimaginable that this problem could go without being fixed, but up until now no one has stepped in the fray to change this red tape fiasco.  Washington needs to wake up to the implications of millions of Americans savings being simultaneously reduced, by law.  This is bound to have an adverse impact on an already suffering economy.

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