The IRS announced some good news for 401(k) savers: The annual 401(k) contribution limit is rising from $18,500 in 2018 to $19,000 in 2019. This means that workers not only get to sock away more money for retirement, but also get to benefit from a larger tax break next year.
Of course, that $19,000 annual maximum applies to workers under 50 only. Those aged 50 and above are allowed a catch-up in the amount of $6,000 that brings 2019's total allowable contribution to $25,000.
Keep in mind that the aforementioned limits do not include employer contributions or matching dollars; they simply reflect the maximum amount employees are allowed to have deducted from their paychecks. Of course, many workers don't come anywhere close to maxing out their 401(k)s, in which case the aforementioned increases may not seem like a big deal. But for those who do aim to max out, the fact that 401(k) contribution limits have increased is clearly a boon.
It pays to max out
The more money you put into any retirement plan at present, whether it's a 401(k) or an IRA, the more you stand to both accumulate for retirement and save on your taxes, provided you're funding a traditional account and not a Roth.
Let's imagine you're 40 years old and are able to max out next year's 401(k) at $19,000. If your effective tax rate is 25%, you'll shave $4,750 off your 2019 tax bill.
Additionally, contributing $500 more a year to your 401(k) could boost your nest egg nicely over time. Imagine you're sitting on a $100,000 401(k) balance at age 40 with the goal of retiring at 65. If you were to contribute $18,500 a year for the next 25 years, you'd end up with $1.71 million, assuming an average annual 7% return on investment (which is a reasonable assumption if you invest your 401(k) heavily in stocks over a lengthy period of time). However, if you were to contribute $19,000 a year over the next 25 years, you'd wind up with $1.74 million, or roughly an extra $31,000, assuming that same 7% return.
Now you might think that an extra $31,000 won't make a huge difference in retirement when you're looking at a rather substantial sum to begin with, but keep in mind that as you age, healthcare expenses can quickly creep up on you, so having extra money never hurts. That $31,000 might also pay for your dream trip in retirement, so even if you're already maxing out your 401(k) at $18,500, it pays to push yourself to reach that $19,000.
Make up for lost time
If you've yet to start saving for retirement and have access to a 401(k), you have a prime opportunity to get yourself back on track, especially with next year's contribution limits being so high. Imagine you're 52 years old without savings, and your goal is to retire at 67 (that's full retirement age for Social Security purposes). If you were to max out your 401(k) for the next 15 years at $25,000, you'd accumulate about $628,000 in time for retirement, assuming the 7% average annual return we've been working with.
Another thing to keep in mind about 401(k) limits is that they tend to increase over time to keep up with the ever-rising cost of living. Therefore, we might see next year's $19,000 and $25,000 limits go up even further once 2020 rolls around. But for now, a $500 increase by itself is certainly something to both celebrate and take advantage of.