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Why the 401(k) 2014 Contribution Limit is Bad News for Workers

Every year, taxpayers look for opportunities to reduce their tax bills, and one of the most popular ways to cut income is to make contributions to 401(k) retirement accounts. But for those who routinely aim to max out their tax benefit, the 401(k) 2014 contribution limit doesn't give them any more ability to save for retirement than they had in 2013. Let's take a look at why those levels stayed the same and what it means for savers.


Image source: 401(K) 2013.

Why was there no increase in the 401(k) 2014 contribution limit?
The contribution limit on 401(k)s has been linked to inflation for years, and that often produces annual increases in contribution limits. For instance, in 2013, 401(k) savers got to save an extra $500 compared to 2012. That followed another $500 increase between 2011 and 2012.

But the contribution limit for 2014 will remain at 2013's levels. Those under age 50 will be eligible to save up to $17,500 in a 401(k). The catch-up provision for those age 50 or older will add $5,500 to that amount, letting them save $23,000 in a 401(k).

The 401(k) 2014 contribution limit didn't change because inflation wasn't high enough to justify an increase. With the Consumer Price Index rising about 1.5% during the period the IRS uses to calculate changes in the contribution limit, the raw, unrounded figure under the 401(k) law rose from $17,547 to $17,820, according to figures calculated by Buck Consultants (link opens PDF). Because the law requires the IRS to round down to the nearest $500 level, the $17,500 amount stayed the same.

Similarly, the catch-up contribution limit stayed the same for the fourth straight year because its inflation adjustment added less than $100 to its unrounded figure.

Good news comes to those who wait
The silver lining for 401(k) savers is that 2015 is likely to be a good year, with both the regular contribution limits and catch-up limit poised to rise at the same time. Inflation would have to come in at just 1% or higher to boost the 401(k) contribution limit in 2015 to $18,000, and the same inflation rate would send the catch-up contribution limit to $6,000.

Until then, though, investors will have to make do with the same 401(k) 2014 contribution limit that they had in 2013. With potential tax savings that could rise as high as almost $10,000 for taxpayers in the highest brackets, though, making maximum use of 401(k)s still makes sense for millions of Americans trying to minimize their tax bill.

Be smart about your taxes
Using a 401k is just one way you can plan to cut your bill to Uncle Sam. In our brand-new special report "How You Can Fight Back Against Higher Taxes," The Motley Fool's tax experts run through what to watch out for in doing your tax planning this year. With its concrete advice on how to cut taxes for decades to come, you won't want to miss out. Click here to get your copy today -- it's absolutely free.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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