The 401k plan is the most popular retirement plan offered by companies today. One of the keys to retirement planning is knowing about the savings tools available to you. If that happens to be a 401k, you have one of the best tools available to save for retirement. Better make the most of it.
Every year the IRS must calculate cost of living adjustments for the 401k and other retirement plans. In keeping with tradition, the IRS recently released a slew of information for the 2015 tax year including the 401k contribution limits.
The decision to raise the 401k limits is based on an inflation index, specifically the Consumer Price Index (CPI). If the CPI meets a certain threshold the IRS adjusts the contribution limits accordingly. Some years inflation is high enough to call for a change other years it’s not. Either way, the point is to make sure the limits aren’t eaten away by inflation.
401k Contribution Limits
The 401k limits for 2016 will be the same as 2015. You can find prior year limits along with all the other rules in this guide to 401k plans. The IRS kept the 401k and Roth 401k at a maximum limit of $18,000.
Some companies offer both a 401k and Roth 401k plan. If you fall into this category, the contribution limits are not per plan. You can contribute to one or both plans, but the combined amount can’t exceed the maximum limit for the year.
The same goes for anyone with multiple employers. You are stuck only saving the maximum even if two or more jobs offer a 401k.
|2016 Limits||Max Contribution||Catch Up Contribution (Age 50+)|
|401k||$18,000||Additional $6,000 ($24,000 total)|
|Roth 401k||$18,000||Additional $6,000 ($24,000 total)|
These contribution limits also apply to 403b plans, 457 plans, and the Thrift Savings Plan.
Catch Up Contributions
The 401k catch up contribution amount was also raised. Anyone who is 50 years old or older can add an extra $6,000 to their 401k savings. This provides a nice opportunity if you’ve fallen behind the last few years or just want to stash more money away.
And if that’s not enough, don’t forget about IRA contributions (it also offers catch up contributions). Anything you contribute to an IRA is separate from your 401k. One of the easiest ways to supplement your retirement savings is with an IRA.
Get The Match
Some employers offer the added benefit of matching a portion of your contributions. At the very least, you should add enough money to get the full company match. Missing out on free money is like turning down a raise. Or think of it this way. The company really wants to pay you now and in the future. In order to get the money you have to save a little of your own today.
The best part is, any company match does not count toward your 401k contribution limit. You’d be crazy not to take advantage of it.
Start Planning Early
The best way to get the most out of your retirement savings is to plan ahead. Now is the perfect time to add more money to your retirement plan this year and to set things up for next year.
When you first set up your 401k contributions, you’ll be asked how much. Don’t fill out a specific dollar amount, instead use a percentage like 15% or more. This way, you never have to change anything when you get a raise or bonus.
There is more to a 401k than just savings, though. Make sure to check your plan and investment choices regularly. Don’t forget to consider the costs when choosing each investment too. If there is anything you don’t understand, contact the plan administrator for more information.