The IRS makes an annual assessment of retirement fund contribution limits, and will increase them if certain cost of living conditions are met. While the IRS won’t increase contribution limits every year, they also won’t decrease them either. At worst, contribution limits will remain stagnant. The good news is the IRS increased 401k contribution limits for 2015. The increase went from $17,500 up to $18,000. Catch-up contributions also saw a $500 increase, from $5,500 to $6,000.
There was also a $1,000 increase to the Total Contribution Limit, which comes to $53,000. The max deferred compensation includes employee contributions, matching contributions, bonuses, and other deferred compensation. (If you are over age 50, you can also add your catch-up contributions to this number, bringing the max total deferred contribution limit to $59,000 for 2015).
Let’s take a look at all of these numbers in more detail and discuss what they mean for investors.
401k Contribution Limits
How to read this chart: The following chart lists the 2015 401k plan contribution limits, along with the contribution limits from previous years. The number under the heading “Employee Contributions” applies to persons under age 50. “Catch-up Contributions” apply to people age 50 and over. The column labeled “Total Contribution Limit” is the maximum you can apply to your 401k plan in any given year, if you are under age 50. This includes all possible contributions, including employee contributions, employer contributions, profit sharing, or any other allowable contributions. The final column is the total contribution limit from all sources for those who are age 50 or older.
||Catch-Up Contributions (Age 50+)
||Total Contribution Limit
||Total Contribution Limit w/ Catch-Up
Limits apply to 401k, 403b, 457, 401a Plans, and Thrift Savings Plan
These contribution limits apply to more than just the 401(k) plan – they actually apply to several different retirement plans that are written into the tax code. These limits also apply to Individual 401k Plans. It is worth looking into your specific plan as there may be slight differences you should be aware of, particularly when it comes to employer contribution rules, profit sharing, or other plan specific topics. TheMilitaryWallet.com covers Thrift Savings Plan contribution limits to discuss some of these examples as they apply to the Thrift Savings Plan, which is similar to a 401(k) plan, but is only available to military members and certain government employees.
These contribution limits also apply to the Roth and Traditional versions of the 401(k) plan and similar employer sponsored retirement plans.
Maximize your 401(k) contributions if you are able
If you are able to maximize your 401(k) contributions, you should be well on your way to setting yourself up for a solid retirement fund. To determine how much to contribute to maximize your 401(k) account this year, divide the maximum you can contribute (either $17,500 or $23,000) by your total salary. The percentage you see is how much you should contribute every paycheck.
If you cannot afford to contribute up to the maximum, then try to at least contribute up to your employer match if your employer makes matching contributions. You should be able to change your contribution limits through your Human Resources Department.
IRA or 401(k)? Another consideration when contributing to your 401(k) plan is whether or not you should contribute to it at the expense of contributing to a Roth or Traditional IRA. I covered this topic in a previous article – where should you invest first – IRA or 401(k)?
In general it is best to contribute enough to maximize any employer contributions you may be eligible for, then try to max out a Roth IRA if you are eligible to contribute.
If you can afford to maximize both investments, then go for it! Here is more information regarding the IRA contribution limits. Whichever you choose, you are doing the right thing by saving and investing for your retirement.
Visit the IRS website for more details regarding 401k plans and other retirement plans.