If you're anything like most of Americans the new year is a time for examining your life, setting goals and finding ways you can make the coming year a better one than the last. The improvements we make in our lives can be anything from changing our diet, to finding a better job or just spending more time with family. Another popular area for making goals is in our financial lives.
At our household we've made the goal this year to be saving as much as we can towards a house down payment as we're hoping to have my home builder in-laws build us a house sometime this spring or early summer. That's a huge savings goal that we're working towards, but there are other goals that we have in mind once we complete that goal.
Once we've bought and paid for our house we'll get back on our savings and investment plan to save as much of our income as we can towards retirement. To start we'd like this year to be the first where we put in the maximum contribution towards our retirement accounts.
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Start Early In The Year And Plan To Max Out Your Investments
I think for most people there are places in their budget where they can save some money in order to create some surplus that they can put towards retirement – beyond what they may already be giving.
Last year at our house we actually probably would have maxed out our contributions if we hadn't decided in the fall that we were going to be building a new house this year. At that point we stopped our retirement contributions temporarily to start saving as fast as we could for our house down payment.
If you do want to max out your contributions to your Roth or Traditional IRA – or your 401k type accounts, it's best to plan ahead and plan on making regular deposits throughout the year to fund your account. When you make the contributions in small amounts with each paycheck it really doesn't hurt as much.
So how much can you contribute to your retirement accounts?
401k And Roth 401k Maximum Contribution
When it comes to your 401k and Roth 401k accounts, you will have one contribution limit combined.
For those who don't know the 401k accepts pre-tax contributions and is taxable upon withdrawal in retirement. The Roth 401k contributions are made after tax, meaning they are tax free at retirement. We have a combination of the two account types in order to diversify our taxes – since we don't know what tax rates will look like when we retire.
So what is the contribution limit for the 401k and Roth 401k? The 2013 401k contribution limit is:
- $17,500 if you’re under age 50
- $23,000 if you're 50 or older
So you can contribute a maximum of $17,500 combined to your 401k and Roth 401k for 2013. If you're 50 or older, that limit rises to $23,000.
How much is that if you get 2 paychecks per month? $729.17 each paycheck, or about $1458.33 per month.
Traditional And Roth IRA Maximum Contribution
The traditional and Roth IRA also have a single combined contribution limit. The Traditional IRA contribution can be tax deductible in certain circumstances and made pre-tax, but are taxable at withdrawal. The Roth IRA contributions are made after tax, but are not taxable at withdrawal. So take that into account.
So what is the contribution limit for the traditional and Roth IRA? The 2013 IRA contribution limit is:
- $5,500 if you’re under age 50
- $6,500 if you’re age 50 or older
So you can contribute a maximum of $5,500 combined to your traditional and Roth IRA in 2013. If you're 50 or older that goes up by $1,000.
How much is that if you have 2 paychecks per month? $229.17 per paycheck, or about $458.33 per month.
How Much Can You Save If You Max Out Your Contributions?
If you were to start saving at age 30, and save the current max for someone under 50 every year ($23,000, or $1916.67 per month), how much would you end up with by a retirement age of age 65?
Assuming an 8% return, after 35 years you'd have almost 4 million dollars (calculator):
That's a lot of money! Admittedly, most people aren't going to be able to max out their retirement accounts each and every year, but imagine if you did? How about even trying to contribute half of that? Contributing $11,500 every year would lead to almost $2 million!
Start Early And Invest What You Can
At our house I want to make it a plan to make retirement savings a priority. While we aren't able to re-start that goal until we're done saving our house down payment, once we do we'll be jumping in with both feet. I know we can max it out if we try.
How about you? Have you thought about trying to max out your contributions? Have you been successful?