Contribution limit for 2019 401 (k) is increasing – Motley's Fool

The IRS has announced good news for savers 401 (k): the annual contribution ceiling of 401 (k) has increased from 18,500 USD in 2018 to 19,000 USD in 2019. This means that workers can not only accumulate more money for retirement, but also benefit from greater tax relief next year.

Of course, this annual maximum of $ 19,000 applies only to workers under 50 years of age. Those aged 50 and over are eligible for a $ 6,000 catch-up, bringing the total eligible contribution for 2019 to $ 25,000.

Do not forget that the above limitations do not include employer contributions nor the corresponding dollars. they simply reflect the maximum amount that employees are allowed to deduct from their paychecks. Of course, many workers fail to achieve the maximum of their 401 (k) s, in which case the above increases may not seem like a big deal. But for those who make aiming to maximize, the fact that the 401 (k) contribution limits have increased is clearly a boon.

It pays the maximum

The more you invest in a 401 (k) or an IRA pension plan, the more you accumulate for your retirement and save on your taxes, provided you are a traditional and not a Roth account. .

Imagine that you are 40 years old and that you are able to maximize your budget next year for the next year to $ 19,000. If your effective tax rate is 25%, you will save $ 4,750 on your 2019 tax bill.

In addition, a contribution of $ 500 more per year to your 401 (k) could boost your savings in the long run. Imagine having a balance of $ 100,000 401 (k) at age 40 with the goal of retiring at age 65. If you were to pay $ 18,500 a year for the next 25 years, you would have $ 1.71 million, assuming an annual return on investment of 7% (which is a reasonable assumption if you invest a lot in your 401 (k ) in actions over a long period). However, if you contribute $ 19,000 a year over the next 25 years, you will get $ 1.74 million, or about $ 31,000 more, assuming the same 7% return.

You may think that an additional $ 31,000 will not make a huge difference in retirement if you initially consider a substantial amount, but keep in mind that, with age, health can quickly accumulate, having extra money never hurts. This $ 31,000 could also finance your dream trip to retirement, so even if you already reach $ 18,500 (401), it pays to force you to reach that $ 19,000.

Catch up

If you have not started saving for retirement yet, and you have access to a 401 (k), you have a great opportunity to get back on track, especially with the contribution limits of $ 401. Next year are so high. Imagine that you are 52 years old without savings and that your goal is to retire at age 67 (this is the age of retirement for social security purposes). If you were to reach your maximum of $ 251 (k) for the next 15 years, you would accumulate about $ 628,000 before retirement, assuming the average annual return of 7% with which we work.

Another thing to keep in mind about the 401 (k) limits is that they tend to increase over time to cope with the rising cost of living. As a result, the $ 19,000 and $ 25,000 limits expected next year may increase once 2020 is over. But for the moment, an increase of $ 500 in itself is certainly something to celebrate and exploit.