401(k) Contribution Limits: What You Need to Know

The most essential step in saving for retirement is participating in your 401(k) plan. By acquainting yourself with 401(k) contribution limits, exploring the details of your plan, and making retirement savings a priority, you'll be one step closer to securing your financial future.

The ins and outs of 401(k) contribution limits
Eligible employees may contribute up to $17,500 to their 401(k) plan in 2014. The catch-up contribution limit for employees age 50-plus is $5,500. Every year the IRS releases the current 401(k) contribution limits, outlining the maximum amount we can invest in our 401(k)s. So far, the limit for next year has not been released.

The 401(k) contribution limit for employee salary deferral plus employer matching contributions is $52,000 in 2014. The amount of employee compensation that can be considered in calculating 401(k) plan contributions is $260,000. For small-business owners and the self-employed, total contributions to a participant's solo 401(k) also can't exceed $52,000 for 2014.

Safeguarding a solid financial future
You can ensure a healthy 401(k) by maximizing your contribution percentage. The average worker deferred 7% of salary into his or her 401(k) in 2012, according to Vanguard. By comparison, a 2012 Wells Fargo Retirement Survey found that only 12% of middle-class American workers were saving more than 10% in their 401(k) plans. Plans within BrightScope's 2013 Top 30 401(k) list averaged more than $12,500 in salary deferrals per participant last year. How do you stack up? Review your finances and, if possible, boost your contribution percentage.

Another way to protect your financial future is to know your employer's matching contribution. Many 401(k) participants take full advantage of their employers' match, but not everyone does. Roughly one-quarter of Vanguard 401(k) plans offer a maximum possible employer match of less than 3%, while the top plans provide employer matches up to 6% or more of pay. Get familiar with your employer's match, because not contributing enough money to receive the full match is leaving cash on the table.

Foolish final thoughts
Take the time to get your financial house in order. That starts with knowing the ins and outs of your retirement plan. Understand the 401(k) contribution limits and sock away as much money as you can. Carve out some time to revisit your elected contribution percentage and employer match, and make the necessary changes to ensure a prosperous future.