Retirement Plans – Contribution Limits Announced
As most people are aware, the maximum amount of contributions an individual can make to her or his 401(k) plan is set each year by the Internal Revenue Service (IRS). That number has not been adjusted for a couple of years.
For the 2013 and 2014 tax years, individuals were able to contribute up to $17,500 as an elective salary deferral to a 401(k) plan.
Additionally, an individual could contribute an additional catch-up contribution of $5,500 starting in the year they turn 50 years of age.
Note that an individual does not have to wait until 50 before making the catch-up contributions, they can do so in the year they turn 50.
Great news! The maximum for contributions to private sector 401(k) plans, the federal government’s Thrift Savings Plan (TSP) and other comparable programs have been raised to $18,000 for 2015. For people over 50 years old, the catch-up contribution threshold has been increased from $5,500 to $6,000.
Unfortunately, the limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500. Also, the additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
Of course you have to maximize contributions to your plan to reap greater benefits; namely a more comfortable retirement. To say that I am not a fan of the old maxim that you should contribute 10% of your salary to a 401(k) plan would be an understatement. I encourage people to think in absolute (i.e. exact dollar amounts) vice relative (i.e. as a percentage of something) with regards to investment goals.
For those who plan to contribute the maximum allowed, the wisest way is to divide the annual limit into equal installments per pay period. Get paid 26 times per year? Your contributions each period on an $18,000 limit would be $692.31 if you are 49 years of age or younger. Turning 50 in 2015 or older? You can contribute $923.08 each pay period on a $24,000 limit.
Studies suggest that those who max out their contributions remain a minority but that group is growing. Currently, it is estimated that 15 to 20 percent of active contributors maximize their contributions. Although you may not be in a position to maximize your contributions, do not get discouraged. However, you must develop a plan for getting yourself into a position where you can slowly increase your contributions until the maximum is achieved. As discussed in my book and on this blog on a number of occasions there is no great secret to how that is done; decrease expenses – eliminating debt being a significant factor – and increase income.
Start making plans to take advantage of the new contribution limits!