In the past year or two we haven't really been contributing much to my company's 401k plan.
There are a couple of reasons for that, but the main one was that we were saving as much as we could for a 20% down payment on a new house. We just moved into our new house about 2 months ago now, and after replenishing our emergency fund a bit, we'll be hitting it hard with the retirement savings again next year.
I like being able to control my retirement savings to a degree, and I have more control over the investment choices and costs associated with the plan outside of my company's 401k. Because of that we'll be contributing the max to our Roth IRA at Betterment.com first. After we max out the Roth IRA, I'll then be switching back to contributions in the 401k.
I'm pretty sure we won't be able to max that out as well, but it's still a good idea to do a quick review of what the 401k contribution limits, rules and regulations will be for 2014 just in case.
The IRS released their 401k contribution guidelines yesterday, and the max contribution remained the same, at $17,500.
The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $17,500.
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401(k) – What Is It?
First things first. What is a 401(k) account, where did it originate?
The 401(k) is a tax-deferred retirement savings account here in the United States. It gets the name 401(k) from the subsection of the Internal Revenue Code where it is laid out.
After becoming law in 1978, the 401(k) was first widely adopted in the 1980s as an alternative to traditional pension plans, which typically were paid for by employers. The adoption of the 401(k) had the effect of shifting the responsibility for saving for retirement from employers to the workers.
There are a whole host of rules and regulations surrounding the 401(k), which govern how much you can contribute, when you can withdraw money and under what circumstances. We'll go into quite a few of those rules here.
Contribution Limits For The 401(k)
The 401(k) has contribution limits beyond which you can't contribute for that year. Despite a small increase in the consumer price index, the contribution limits will not go up from $17,500 this year. The following table will show the maximum yearly contribution for the 401k account type every year since 2007.
|Year||401k Contribution Limit|
For the past 8 years have seen an increase of $2000 in the 401(k) contribution limits.
Employer Contribution Limits For 401(k)
Employers are able to contribute to an employee's 401(k) plan as well. If your employer offers to contribute, take them up on that offer. It's free money!
Employers often will contribute a percentage match, of your contribution up until a certain percentage of your income. For example, they may match 50% of your contributions, up to 6% of your salary.
Certain employers will also cap how much you can contribute to the company's 401k plan. If you are a highly compensated employee (HCE), making above $115,000 in 2014, you might be subject to additional limits in your company's 401(k). The rules get a bit complicated, and the rules are essentially there in order to encourage more 401(k) plan participation by less highly paid employees, but because of them often a company will not allow HCE to contribute more than a certain percentage of their income.
Just make sure to check with your 401(k) plan administrator to find out what your plan's limitations are. They may be different from the government limits.
50+ 401(k) Catch-Up Contribution Limits
If you are at or over the age of 50 by the end of the 2014 tax year, and your plan allows it, you can make a catch up contribution to your 401(k) plan.
|Year||401k Catch-Up Contribution Limit|
There is no increase this year of catch up contribution limits, so it will remain at $5500.
Do Employer Contributions Affect Your Limit?
One source of some confusion for people is whether their employer's contributions to their 401(k) will affect their own contribution limits. In other words, will their limit of $17,500 be affected by their employer's contribution to their account. In short, it won't affect the employee's limit.
The limits for employer and employee contributions are separate, and don't affect each other. That's good news because it means you can contribute more if your employer is making contributions for you!
Example: If someone makes $100,000 in pre-tax compensation, and their employer will contribute 50% of the first 6% , they could have $17,500 contributed by the employee, and $3,000 by the employer for a total of $20,500. If they're over 50 they could also make catch up contributions for a total of $26,000.
One more thing to consider when looking at 401(k) plans for 2014. The maximum contribution to a 401(k) plan when taking into account employee contributions, employer matching and other contributions is $52,000 or 100% of their compensation, whichever is less.
Hopefully I'll be in a position some day to be putting in and receiving that kind of a contribution!
Do you contribute to a 401(k)? Do you expect to reach the max contribution next year?