Investing in your 401k plan or other retirement account is one of the easiest and best ways to prepare for retirement. These accounts offer an incredibly valuable tax advantage for investors. But there are limitations to these plans. Each year the IRS evaluates and releases updated 401k Plan Contribution Limits. These limit is the maximum you can contribute based on your age.
While the IRS won’t increase contribution limits every year, they also won’t decrease the contribution limits either. At worst, contribution limits will remain stagnant.
How Much Can I Contribute to my 401k in 2019?
The maximum employee deferral for 2019 is $19,000 per person. The employee deferral is the amount the employee can contribute to their 401k plan from their paycheck.
There is also a maximum Catch-up Contribution of $6,000, which is only available to participants age 50 and over.
2019 saw a $500 increase for the maximum employee deferral over the 2018 tax year. This is the second increase in a row, after not seeing any increases since 2015. (See the chart below for historical 401k contribution limits).
There was also a $1,000 increase to the Total Contribution Limit for 2019, which now comes to $56,000. 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 $62,000 for 2019).
Let’s take a look at all of these numbers in more detail and discuss what they mean for investors.
Maximum 401k Contribution Limits – 2007 – 2019
How to read this chart: The following chart lists the maximum 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.
|Year||Employee Contributions||Catch-Up Contributions (Age 50+)||Total Contribution Limit||Total Contribution Limit w/ Catch-Up|
These Contribution 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 (also called the Solo 401k; this is a small business retirement plan).
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. There are two easy ways to determine how much to contribute to maximize your 401(k) account this year.
Fixed contributions: If your company allows contributions of a flat dollar amount per month or per check, then simply contribute that amount from your paycheck. If you are under age 50, then you would be able to contribute up to $1,583.33 per month (or $791.66 if you are paid twice each month). If you are age 50 or over, you can contribute up to $2,083.33 per month, or $1,041.66 per check if you are paid twice per month.
Remember, those are the numbers to max out your contributions. You can contribute less than that amount if that is what works with your budget.
Percentage based contributions: If your company doesn’t allow you to make a flat rate contribution, then you will need to do a little math. To do this, divide the maximum you can contribute (either $19,000 or $25,000) by your total salary. The percentage you see is how much you should contribute every paycheck. For example, if you earn $100,000 per year and you can contribute up to $19,000 to your 401k, you need to contribute 19% of your salary ($19,000 / $100,000 = 19.0%).
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.
The employer match is part of your compensation package and is essentially free money. Not contributing up to this amount is like leaving free money on the table!
You should be able to change your 401k contribution amount, your tax withholding, and other similar actions through your Human Resources Department.
What about contributing too much to your 401k? There are annual contribution limits, so you will want to avoid contributing too much. The IRS will likely penalize you if you aren’t able to correct the problem by the end of the calendar year. Thankfully, many HR offices and 401k plans have systems in place that will either prevent over-contributions or will automatically refund the overage.
However, those systems, by default, can only work if you remain employed by the same company for the entire year. You will want to pay special attention to the annual 401k contribution limitations if you change jobs during the year.
If you do happen to contribute too much, I strongly recommend working with your HR department or 401k plan administrator as soon as you notice the issue. You may also want to consult with a tax professional to help you understand if there will be any long-term ramifications or if you will owe any additional taxes or penalties.
IRA or 401k? – Which is Better for Retirement Planning?
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. This gives you the best of both worlds when it comes to current and future taxes. Tax flexibility is an important retirement planning tool.
Why Contribute to an IRA? For the most part, IRAs have similar tax rules as 401k plans. However, they have a few important benefits – namely, they are more flexible, as you control how and where your investments are made. This allows you more freedom and control over investment types, and more importantly, investment costs (this article covers what to do if your 401k plan has poor investment options). Roth IRAs also don’t have Required Minimum Distributions (RMDs), which exist in all 401k plans, including the Roth 401k.
If you can afford to maximize both investments, then go for it!
Here is more information regarding the IRA contribution limits.
Whichever retirement plan 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.