One of the common questions we are asked is ‘how much can I contribute to my 401k’? Well, there are rules in place limiting the amount of income you can invest into your 401k, although these limits affect relatively few people.
CBS News reported in 2011 that just 5 per cent of around 60 million 401k plan participants actually contributed the maximum amount to their retirement savings.
The simple answer to the above question is that you can contribute whatever you like up to the maximum limits. However, if you want to maximise your income in retirement then it may be worth considering paying in somewhere approaching the maximum. Our guide explains the 401k contribution limits.
Maximum 401k contribution limits
Contribution limits to 401k plans are reviewed every year depending on inflation. While the maximum limit was the same between 2009 and 2011, the contribution limit to 401k plans increased in 2012 and 2013. The pre-tax 401k contribution limits set by the IRS over the last few years have been:
- 2008 – $15,500
- 2009 – $16,500
- 2010 – $16,500
- 2011 – $16,500
- 2012 – $17,000
- 2013 – $17,500
So, this means that you in 2013 you can contribute up to $17,500 into your 401k plan.
Since the Restoring Earnings to Lift Individuals and Empower Families (RELIEF) Act of 2001, you are now allowed to catch up on lost time and to enhance your retirement fund.
If you have reached the age of 50 or over, you can make an additional ‘catch-up’ contribution to your 401k plan. This additional limit allows people who reach the age of 50 before the end of the calendar year to make additional 401k contributions on a pre-tax basis. The past and current ‘catch-up’ limits are:
- 2008 – $5,000
- 2009 – $5,500
- 2010 – $5,500
- 2011 – $5,500
- 2012 – $5,500
- 2013 – $5,500
So, if you are aged 55 in 2013, you can contribute $17,500 to your 401k plan plus an additional amount of $5,500 – totalling $23,000.
Pre-tax contributions are more affordable than you think
As we mentioned earlier, only around 5 per cent of 401k plan holders maximise their contributions every year. However, making these investments could be more affordable than you think.
CBS News reports that ‘while contributing $17,000 a year may sound like a lot of money, it’s only about $210 per week after the tax savings are factored in. Another way to look at it is that when you make pre-tax contributions of $17,000 to your 401(k) plan, you can save approximately $6,000 in federal and state income taxes each year.’
When working out what to contribute to your 401k plan, it’s always worth remembering that you should invest something rather than nothing. Pay in what you can afford and increase your contributions when you can.