For the last few years we haven't been doing as much investing as we would like as we've had a variety of health issues in our family (and associated medical bills), babies being born and other expensive situations to pay for.
After paying for all of those things we decided that we wanted to max out our emergency fund before maxing out our retirement account contributions because you never know when your job may be downsized in an economy like this.
This past year after we finally maxed out that 12 month emergency fund we finally started contributing close to the maximum to my 401(k) account through my job. This year as we make further changes we'll be contributing right up to the maximum for 401(k) accounts, and we may also being contributing to the Roth IRA as well.
One thing that was a pleasant surprise this year was that for the first time in several years the 401k maximum contribution was increased.
401(k) Maximum Contributions Increased For 2012
For the first time since 2009 the maximum contribution to a 401(k) account has increased. So why did the limit go up? The limits went up as a result of higher inflation and the latest cost of living adjustment (COLA) data, which also resulted in benefits increases this year for Social Security recipients.
So how much have the max contributions gone up? By $500. Here are the maximum contributions for the last 6 years.
| Year | 401k Contribution Limit |
|---|---|
| 2007 | $15,500 |
| 2008 | $15,500 |
| 2009 | $16,500 |
| 2010 | $16,500 |
| 2011 | $16,500 |
| 2012 | $17,000 |
| 2013 | $17,500 |
| 2014 | $17,500 |
| 2015 | $18,000 |
So as you can see from the table the max contributions have gone up by a total of about $1500 since 2007. It would be nice if they had gone up even more, but having an increase this year is better than nothing. Most people probably won't be contributing that much anyway I suppose, although they probably should.
Increasing Our Contributions To 401(k) And Roth 401(k)
So in the first week of the year this year I increased our contribution to my company's combination 401(k) and Roth 401(k) plans. Since the two account types carry a combined $17,000 limit, I'm diversifying my tax situation a bit and contributing to both pre-tax and post-tax accounts, although slightly more to my pre-tax 401(k).
NOTE: So how much would you have to contribute to put in the maximum in your 401(k) this year? It comes out to about $1416.67 per month, or if you have two pay periods every month – about $708.33 per paycheck.
Over 50? Catch-Up Contribution Limits For 401(k)
If you're over 50 years old before the end of 2012 you can make a catch-up contribution of $5,500 to your 401(k). Most plans allow this, although there are those that don't, so check with your plan administrator. Here's a look at the catch-up contribution limits for the past few years.
| Year | 401k Catch-Up Contribution Limit |
|---|---|
| 2007 | $5000 |
| 2008 | $5000 |
| 2009 | $5500 |
| 2010 | $5500 |
| 2011 | $5500 |
| 2012 | $5500 |
| 2013 | $5500 |
| 2014 | $5500 |
| 2015 | $6000 |
Employer Contribution Limits For 401(k)
If you're one of the lucky few who still have an employer contributing to your account, you don't have to worry about their contributions affecting your own contribution limit. The employer has a separate limit of up to 6% of the employee's salary.
The total maximum 401k contribution for this year for an employer to their employee would be $33,000, for a combined total of $50,000 (33k+17k). Add to that the $5,500 contribution if you're over 50, and you can have a total amount of up to $55,500.
Conclusion
So we have now upped our contribution amount so that we're going to reach the maximum contribution to the 401(k) this year, for the first time in some time. It feels good to know that we're making wise investing decisions and saving for our future.
Are you, or are you planning to contribute to the maximum? Why or why not? Tell us your thoughts in the comments.
We are a LONG ways from maxing out the 401k. We put 6% of my husband’s gross into the 401k to get the full match, though I realize we could gradually bump that up and probably not even notice, since it’s pre-tax.
We put the rest into our Roth IRAs, which we are not maxing out yet.
If you don’t make too much to contribute to a Roth, I’m curious — why max out the 401k before putting money in the Roth?
We don’t make too much to contribute to a Roth, but since my 401k contributions are a combination of both Roth 401k (post tax) and 401k (pre-tax), we’re already diversified a bit in our tax situation. Also the fund options/etc in my 401k have improved over the past year or two, so there are plenty of low cost options. We’ll probably be contributing to the Roth IRA as well this year though as that has a separate limit.
Are you able to take withdrawals from your Roth 401k without penalty or tax? That’s one of the benefits of the Roth IRA, as you most likely know.
I don’t want to ever get to the point where I’m making a withdrawal from my IRA until I’m 59 or older, but I like knowing it’s a “catastrophic event” emergency fund.
My understanding is that it’s a bit different for a Roth 401k in that if you take an early withdrawal you’ll be taxed on that money based on the percentage of the total amount that is earnings/interest versus contributions. So if your account was 80% contributions and 20% earnings, any non-qualified distributions you take would be 20% taxable.
We’ve got a 12 month emergency fund in order to cover any catastrophic events though, so we don’t anticipate taking any money out anytime soon.
Fair enough. I was getting more at, something so big the emergency fund couldn’t hack. But, if you’re happy with your work options, it’s probably fine to keep it as-is instead of worrying about setting up the Roth IRA.
I’m surprised at how many folks don’t participate in 401k at all. When I started it I only did 3% and raised it every time I got a raise at work. I stopped at 10%. My company match is .75 on the dollar…easy money and a no brainer!