How Do 401(k) Contribution Limits Affect Me?

May 7th 2016

New Limits

The new limits for annual contributions rose to $53,000 total between employer and employee contributions for 2015. In 2014, the total contributions made from all sources stopped at $52,000. For taxpayers younger than 50, the maximum contribution for an employee is $18,000, up from $17,500. Taxpayers 50 and older get an additional $6,000 annually as a catch-up amount, which rose from $5,500 in 2014.

Front-End Loading

Annual employee compensation limits top out at $265,000, which represents a $5,000 increase from 2014. This means employees may contribute money up to $18,000 until their annual salary reaches $265,000. If you reach $265,000 in compensation in October, any contributions you make must go towards your 401(k) plan before you make that amount. Over the first nine months of the year, you may contribute $2,000 per month, or more, until you reach the maximum annual contribution limit. Once you make $265,000, you cannot contribute more money to a 401(k) plan.

Save on Income Taxes

For the annual employee contribution limit, taxpayers can send $1,500 per month for 12 months for a total of $18,000. This represents $42 more per month than in 2014 if you maxed out on contributions the year before. Someone in the 25 percent tax bracket could save up to $4,500 in income taxes by contributing the maximum amount. If your tax bracket goes lower when you start withdrawing from a 401(k) plan, you will pay less in income taxes now, but you will have to pay them when the money is withdrawn from your account. Workers 50 and older can save $2,000 per month to reach the $24,000 limit, and save as much as $6,000 in federal income taxes at the 25 percent bracket.

Note Your Employer Contributions

Note your employer's contributions based on your employee contract. Vanguard data shows employers average 50 cents in contributions for every employee dollar that goes towards a 401(k) plan, up to 6 percent of pay. For someone who makes $60,000 per year, an employer match could be worth up to $1,800 into an account for 2015. Be sure your employer knows that contribution limits rose for 2015.

Conclusion

The Internal Revenue Service increased contribution limits for employers and taxpayers who contribute pretax dollars to 401(k) pension plans. These new limits affect individuals in several ways, including how much money each person contributes per paycheck to reach the maximum annual contribution limit, and how much tax savings someone can have by deferring taxes on 401(k) plans.

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