What You Need to Know About 401(k) Limits in 2014

The most important step in saving for retirement is participating in your 401(k). By familiarizing yourself with 401(k) limits in 2014 and making retirement planning a priority, you're sure to get the new year off to a prosperous start.

New year, few changes
For the past two years, the IRS has boosted 401(k) contribution limits due to rising inflation. But that's not the case for 2014.

Taxpayers may contribute up to $17,500 to their 401(k) plan in 2014, which is the same amount as in 2013. The catch-up contribution limit for employees age 50 and older is also unchanged at $5,500. Roth 401(k) contribution limits are the same as those for traditional 401(k)s, yet the tax treatment is different. Although traditional 401(k)s give you a tax deduction today, you must settle up with Uncle Sam when you withdraw the money. By comparison, Roth 401(k) accounts let you contribute after-tax dollars. Withdrawals from the Roth, including the earnings, are tax-free in retirement.

One change to 401(k) limits for 2014 includes the total annual defined contribution from all sources. The limit for employee salary deferral plus employer matching contributions will rise to $52,000, up from $51,000 in 2013. Also, the amount of employee compensation that can be considered in calculating 401(k) plan contributions will increase from $255,000 to $260,000. For small-business owners and the self-employed, the amount they can save in a solo 401(k) increases to $52,000, up from $51,000 in 2013.

How do you measure up?
Roughly 11% of 401(k) savers contributed the maximum amount possible, according to a 2012 Vanguard study. And a Wells Fargo Retirement Survey of middle-class American workers found only 12% are saving more than 10% in their 401(k) plans. By comparison, the average worker defers 7% of salary into his or her 401(k). Now is a great time to review your finances and make a resolution to boost your contribution percentage.

One more way you can ensure a healthy 401(k) is to know your employer's matching contribution. Many 401(k) participants take full advantage of their employer's match, but not everyone does. Last year, Marathon Oil (NYSE: MRO  ) topped BrightScope's Top 401(k) Plans list. Part of the reason it took the No. 1 spot is that the company matched dollar-for-dollar up to 7% of salary contributed to the plan. By comparison, a typical employer matches up to about half that amount. Familiarize yourself with your employer's match, because not contributing enough money to receive the full match is leaving cash on the table.

Foolish bottom line
Make a New Year's resolution to get your financial house in order. That starts with knowing the ins and outs of your retirement plan and contributing as much as you can. Even though the 401(k) limits for 2014 are unchanged from last year, use this time to revisit your elected contribution percentage and employer match and make the necessary changes to ensure a prosperous future.

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