Recently, we had a dust up here at The Motley Fool on the subject of 401k plans. James Altucher made a video for Business Insider where he claimed that -- especially for young people -- putting your money in a 401k plan was a complete waste.
Our own Morgan Housel responded by calling out Altucher for ignoring many of the benefits that come with investing in a 401k -- namely, its tax advantages and the fact that companies usually offer a match that is completely wasted if employees opt out.
While Altucher did indeed bring up some shortcomings of 401k plans -- like how much fund managers pay themselves, that's hardly a reason to abandon them altogether. For those who want to take full advantage of their plan, there are three important numbers to keep in mind for the maximum 401k contribution for 2015.
The first number is probably the most important. If you are under the age of 50, you are allowed to put away up to $18,000 in your 401k this year. That's $500 more than last year and -- more importantly -- it does not include any match that your employer might be throwing in. That being said, most companies cap their overall matches at $3,000 to $4,000.
For those over 50 years old, the IRS allows for $6,000 extra dollars to be put away -- again $500 more than last year. Combined with the bump in normal elective deferrals, that means those over 50 can put away $1,000 more than last year. And as is the case for younger workers, this does not include any employer matches.
What's with the $53,000 401k contribution limit?
What almost everyone ignores, however, is the $53,000 defined contribution limit. For many people, this number is ignored simply because they can't afford to put that much money away for retirement and still have enough to live off of.
But for high earners, those with ultralow expenses, or empty nesters who may now own their home and have put their children through college -- this little-known limit could be a huge boon. While any money you put away in your 401k above $18,000 (or, for those over 50, $24,000) is not tax-advantaged, you can use a little known trick to your advantage.
First pointed out to me by the Mad Fientist blog, you can convert your nontax-advantaged 401k contributions into a Roth IRA. This means that all that money will be allowed to grow tax-free and -- after the age of 59 1/2 -- be withdrawn tax-free as well.
There are lots of caveats to make this happen, and it's important to consult your own financial planner before attempting this, but to get the nuts and the bolts of the plan, I suggest visiting an earlier piece I wrote on how to ignore Roth IRA limits and use these 401k contribution limits to help accelerate your pace of retirement savings.
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