401k Contribution Limits Face Potential Fall

DAVID PITT

DES MOINES, Iowa (AP) — You've probably heard it over and over again: contribute up to the maximum amount in your 401(k) plan to improve your chances of a comfortable retirement.

That's the advice of many financial experts, who say it's the best way to get back the money the stock market collapse drained from your account.

However, the maximum contribution is established by using a formula tied to the third quarter Consumer Price Index for all urban consumers. That's normally not a concern for investors because inflation has steadily increased. What's potentially troubling is that the CPI-U figure for this year, to be released on Oct. 15, is expected to be lower than a year earlier.

The CPI-U measures the average change in the prices of goods and services including food, clothing, shelter, fuel, drugs and other day-to-day items bought by U.S. urban consumers. It is released by the U.S. Department of Labor.

The CPI-U jumped more than 5 percent in the third quarter of 2008 compared with the same period a year earlier, which bumped up the contribution limit for this year. But, since March 2009 the index has come in below the corresponding 2008 value. It's anticipated that this year's third quarter will be lower than the 2008 figure. That means for the first time ever, the Internal Revenue Service is faced with the likelihood that the maximum contribution level — now at $16,500 — will be lower than the year before. If current assumptions are correct, the CPI-U number will lower the amount you can contribute to your 401(k) in 2010 to $16,000.