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Retirement Contribution Limits Upped By $500. Here's How Much Difference It Makes.

By Kailey Hagen – Jan 27, 2019 at 2:00PM

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For the second year in a row, limits have risen, and your nest egg stands to benefit.

Regularly setting aside money in a 401(k), IRA, or other retirement account during your working years is essential for achieving a happy retirement. And if you're using tax-advantaged retirement accounts, you're also saving on taxes, either now or later depending on the account. The IRS puts a cap on the amount of contributions you can make, but every year it reevaluates these numbers for an occasional increase.

For the second year in a row, allowable contributions have risen. Now, you can contribute up to $19,000 to a 401(k) and $6,000 to a traditional or Roth IRA in 2019, up from $18,500 and $5,500 in 2018, respectively. Adults 50 and older are allowed catch-up contributions, in the form of an additional $6,000 contribution allowance for a traditional 401(k) and $1,000 for a traditional or Roth IRA. A $500 increase may not seem significant, but over time it makes a very big difference. I'll explain below how much that extra $500 could be worth by the time you retire and how you can free up more cash in your budget to save for retirement. 

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Image source: Getty Images.

The true value of an extra $500 retirement contribution

Remember this key: It's not about the $500 you're putting in today, but about how much that amount will grow by the time you're ready to retire.

Let's imagine you contribute last year's maximum contribution of $18,500 to your 401(k). After 30 years and assuming a 7% rate of return, this amount would grow into $140,827.

Now, let's assume instead, that you make 2019's maximum 401(k) contribution, socking away the full $19,000. Holding all else equal, your initial contribution would grow into $144,633 after 30 years. That's an total difference of $3,806 from the extra $500 you put in today. And this number grows further if you leave the money in your 401(k) past our 30-year outlook.

Even if you can't afford to max out your retirement contributions for the year, this example demonstrates how contributing a little extra can make a significant difference in the long run thanks to compounding growth, especially if you're still decades away from retirement.

But finding the extra cash to put toward your retirement savings is easier said than done, so here are a few ideas to get you started freeing up more of your money.

How to increase your contributions to retirement accounts

You'll probably need to find ways to reduce your spending and increase your income. There are many approaches: You could cut back on discretionary purchases, like dining out, buying new clothing, and subscription services. Or you could pick up a side job, pursue a promotion, or switch to a higher-paying field.

If your employer matches 401(k) contributions, increasing your personal contributions to get the full match will boost your retirement savings using free money from your company. Be mindful of the vesting schedule though, which determines when the funds from your employer become yours to keep. If you leave your workplace before you're fully vested, you could lose some or all of these employer-matched funds.

It's a really good idea to automate your retirement contributions, so you don't even have to think about it. If you automate, you'll never forget to set that money aside or accidentally spend it. If you have a 401(k) through your employer, you can usually set up automatic contributions to be taken out of your paycheck. You may be able to set up your IRA to take automatic contributions out of your bank account.

Saving for retirement isn't easy, but if you can find some extra cash to put away, it can make a big difference in the long run thanks to compound interest.

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