2010 401(k) Contribution Limit Won’t Be Adjusted

If you are thinking of putting aside a little more for your retirement next year, you won’t get any help from the government because the 2010 401(k) contribution limit will remain at the same level as this year at $16,500 (the catch-up limit for workers 50 years old and order will also be the same as in 2009, at $5,500).

The reason for keeping the contribution limit steady for another year is that, according to Labor Department’s latest inflation report released on Thursday, Consumer Price Index (CPI) fell in the third quarter from the same period last year. Because there’s no inflation (at least as the CPI number shows), the annual contribution of 401(k) plan, as well as Social Security benefit, which is tied to the inflation, won’t be adjusted.

This isn’t the first time when the government maintained the maximum contribution of retirement plan unchanged. For example, the limit remained at the same level of $15,500 for 2007 and 2008. The maximum amount was adjusted every two years between 1994 and 2001.

While it makes sense to adjust the contribution limit based on the inflation, there are man people believe that CPI isn’t a good gauge for real inflation because goods that we consume every day, such as food and energy, are excluded from the calculation (the so-called core CPI) because they are volatile. Even though we spend a much smaller portion of our income on food nowadays than when CPI was first measured 90 years ago (the Labor Department started the statistics in 1919), food does become expensive year over year and the costs to fill up our cars and heat our homes also get higher and higher. Further more, since the Fed makes their rate decision based on core CPI, a low reading means the Fed can keep the interest rate low, which will lead to greater inflation risk, especially when the index doesn’t track the increase of  cost of living quick enough.

Now that there won’t be any increase in contribution limit next year, it doesn’t seem to be a big deal for one year. However, it is a big deal in the long term for those who max out their contribution every year. Just consider this: How much will today’s $500 be worth 20 or 30 years from now?

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