A participant’s contribution to a 401(k) plan cannot exceed the lesser of 100% of pay or an indexed dollar limit. For 2005 this indexed limit is $14,000. If in addition to the employee 401(k) contribution there are matching contributions, profit-sharing, or other company contributions, then the 100%-of-pay (but not the $14,000) limitation is reduced.

In addition, a participant who is at least 50 or will be 50 in 2005 and who has made the maximum 401(k) contribution to the plan, may make an additional "catch up" contribution of up to $4,000.

The tax advantages to the participant are as follows:

1. Amounts contributed are not subject to federal (and most state) income taxes when contributed, and may even result in a lower tax rate being applied to the distribution when it is actually received; and
2. Earnings on contributions accumulate on a tax-deferred basis.

If there are company matching or other contributions, then the company receives a deduction for the amount it contributes.

The following table illustrates the tax advantages of a 401(k) plan. The illustration assumes that there is a 20% company matching contribution. Only federal-tax savings are shown. Additional tax savings may result from state and local income taxes.

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