Contributing to your 401(k), especially if your company offers a match, is a no-brainer. After all, you want to be as prepared as possible for retirement. The good news is that the 401(k) contribution limit jumped up to $18,500 for 2018. Catch-up contributions for those 50 and older allow for $6,000 more you can toss into your 401(k). But should you contribute up to the 401(k) contribution limit? Read on to learn about how best to manage your 401(k) to be a savvy retirement saver.
What Is a 401(k) Contribution Limit?
As a quick refresher, a 401(k) is an employer-offered retirement plan that can offer you a substantial tax break on money you save for retirement. Most of the time, the money is withdrawn from your paycheck and automatically invested. The IRS imposes a limit on just how much money annually you can contribute to your 401(k) account. This is called the 401(k) contribution limit.
Simply put, the money you invest in your 401(k) lowers your remaining yearly taxable income. For instance, if you make $100,000 per year and put the maximum contribution, $18,500, into your 401(k), you’ll only owe taxes on $81,500 of your income. In addition, that $18,500 contribution will go into your savings untaxed. The contribution limit occasionally changes to reflect accompanying economic conditions.
What Is the 2018 401(k) Contribution Limit?
The official IRS limit for maximum employee contribution to a 401(k) is $18,500. This is a $500 increase from the 2017 and 2016 maximum, $18,000. Contribution limits tend to increase at a more noticeable pace during the years where inflation rates also climb. This has been the case since 2008, as the rate has either increased or stayed the same every year since.
There is a loophole for older workers: if you’re age 50 or older and still an employee, you are permitted to tack on an extra $6,000 per year to your contribution. That is a catch-up contribution. This addition brings the contribution for workers over age 50 to $24,500 in 2018. Investments are due for all 401(k) account holders at the end of the calendar year.
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Should You Meet the 401(k) Contribution Limit?
Many people would say that if you have the means, you should go right ahead and contribute the full $18,500. But some professionals would urge you to think about redirecting your money elsewhere. Namely, certain pressing non-retirement needs may well come first. These can include paying off high-interest debts, stocking emergency funds, maintaining solid health insurance and investing in long-term care insurance if you’re 50 or older.
Alternatively, if you’ve covered your current financial needs and are prepared for the ones that may arise, consider making a large contribution to your 401(k). Exactly how much should you contribute to your 401(k)? Not sure where to start in your figuring process? Investigate your employer’s 401(k) matching policies, and commit to contributing at least enough to get the full match. For example, if your employer agrees to match your 401(k) contributions up to 4% of your salary, do your best to contribute at least 4% of your salary.
The 401(k) contribution limit for 2018 is $18,500. Workers 50 and older get a catch-up contribution of $6,000, so they can contribute up to $24,500 annually. Be sure to contribute at least up to your company’s match. Once you square away your other financial commitments, eliminate debt and have a cushion of funds for emergencies, consider trying to reach toward the 401(k) contribution limit.
Smart Tips for Managing Your 401(k) Retirement Savings
- Create a comprehensive list of where else you may need to allocate funds as create an arsenal of financial preparedness. These can include life insurance, disability insurance or even flood insurance. It’s a noble pursuit to maximize the amount of money you can rely on once you’re no longer working, but don’t neglect your financial needs in the present.
- Decide where you want to retire. The later you plan to stop working, the less vital it is to save. After all, you’ve got plenty of time. But if you’re looking to quit before age 65, due diligence is necessary: you’ve got to save as much as you possibly can, or you’ll find yourself needing to pick up a part-time job way later than you planned. Be sure to look into the best states to retire for taxes.
- Leverage percentages data with expert advice. If you’re planning to retire at the national average (65 years of age), most financial advisors would tell you to save 10 to 20 percent of your income each year to put aside for retirement. If you calculate and figure that this would amount to a large sum of money, you may want to do your best to maxi out your 401(k) before searching for additional options.
- 401(k)s are not the only retirement plans on the market. You could also consider IRAs. Traditional IRAs and 401(k)s receive a similar tax treatment, if you’re looking to get a sum of your earnings exempted.
- If you work for an employer that offers the opportunity to match your contribution, it is in your best interest to commit to investing at least that much into your 401(k). This is as close as you may get to free money.
- Still not sure whether you should contribute $18,500 to your 401(k) this year? Speak to a financial advisor who can set you on the right track, with consideration of your assets, debts and savings. Find a great financial advisor in your neighborhood with our free matching tool.
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