401(k) contribution limits get a boost for 2015
Washington is letting us make slightly larger contributions to our 401(k) plans in 2015.
Workers under the age of 50 will be able to put $18,000 into their employer-sponsored retirement plans next year, up from $17,500 this year.
Those 50 and older will be allowed to make an additional $6,000 catch-up contribution, an increase from $5,500 this year. That brings their total contribution limit to $24,000, up from $23,000 this year.
You'll barely miss that extra $500 or $1,000 per year, but it will make a big difference in your retirement savings.
Young savers who stash away an extra $500 a year over a 25-year period will add an additional $35,000 to their retirement account, assuming a 7% average annual rate of return.
Employees closer to retirement, who save an additional $1,000 annually, can grow their holdings by $19,000 over the next dozen years.
You can use our 401(k) calculator to see how maxing out your account would boost your retirement income.
Next year's increase in contribution limits is a modest one, but the Internal Revenue Service can only boost the limits to keep up with inflation.
With the Consumer Price Index up only 1.7% over the past year, we're lucky the IRS gave us even a modest increase in the caps.
Of course, most of us don't max out our 401(k) plans.
Employees could have contributed up to $17,500 to their 401(k) plan in 2013 and another $5,500 in catch-up contributions if they were age 50 or older.
But according to Vanguard's annual How America Saves report, only 12% of the company's more than 3 million 401(k) participants maxed out their accounts.
As you might suspect, high-income households (those earning $100,000 or more) were far more likely to max out their 401(k) than middle income households earning $50,000 to $74,999 — 36% versus 2%.
But reaching that point is a critical milestone in almost everyone’s effort to build financial security for themselves and their families.
Contributions to traditional 401(k) plans are tax-deductible and your savings are allowed to grow tax-free until you need them.
These retirement plans provide one of the two biggest tax breaks available to middle-income Americans (the mortgage deduction is the other).