Photo: TaxCredits.net via Flickr.
So put me on a highway,
And show me a sign,
And take it to the limit one more time.
--The Eagles
Most of us are familiar with 401(k) plans, as they've grown very prevalent in American workplaces as pensions disappear. You probably know that they permit you to sock away pre-tax dollars, lowering your current tax bill, and then tax you on withdrawals later, in retirement. Still, you may not know some important things about 401(k) contribution limits.
Let's start with the 401(k) contribution limits that many people are familiar with. I'll also include the relevant numbers for 403(b) and 457(b) plans, which are both similar to 401(k) plans. 403(b) plans are designed for employees of public schools, churches, and certain nonprofit organizations. 457(b) plans are designed for employees of city, county, and state government entities, along with public schools and colleges.
Below are the 403(b), 457(b), and 401(k) contribution limits for this year:
|
Plan type |
401(k) |
403(b) |
457(b) |
|---|---|---|---|
|
Basic limit |
$17,500 |
$17,500 |
$17,500 |
|
Catch-up contribution limit for those aged 50 and older |
$5,500 |
$5,500 |
$5,500* |
|
Total limit for those 50 and older |
$23,000 |
$23,000 |
$23,000 |
*Not available to those who work for of tax-exempt employers.
One key thing to note about these numbers is that they're far bigger than the IRA limits, which, for 2014, are a mere $5,500 (plus $1,000 for those 50 and up).
The hidden limit
But 401(k) contribution limits are actually even larger than the table above shows. That's because the table is focused on employee contributions, a.k.a. "elective deferrals." Employers can also contribute on their employees' behalf, often matching the contributions of their workers up to a certain percentage of their wages.
The total 401(k) contribution limits thus include both employee and employer contributions, and for 2014, the cap is $52,000 combined ($57,500 for those 50 or older). Thus the contribution limit for employers is $34,500 for all three types of plans (or 100% of the employee's salary -- whichever is smaller).
How can you get as much of that money as possible? You don't have too many options, other than securing a job with a generous employer. Employers that offer a 401(k) match typically contribute $0.50 or $1 for every dollar an employee contributes, up to 6% of the employee's pay. According to Fidelity, the average match recently amounted to 4.3% of salary, or $3,540. The folks at Bloomberg recently put together a list of the most generous major employers -- see if your employer or potential employer is on it.
Be strategic
Know, too, that even if we don't approach the 401(k) contribution limits, just about all of us should aim to grab as much in matching contributions as possible from our employers -- after all, it's free money! Still, that's sometimes easier said than done. My colleague Dan Dzombak has explained:
While many [employers] will match contributions as a percentage of salary, the exact way they do this varies and can have major consequences. Many employers have vesting requirements, meaning that you must have worked at the company for a certain number of years before you can receive the matching contributions. Others will only match your salary as a percentage of each paycheck, so you miss out on a lot of money if you contribute to your 401(k) as a lump sum.
Finally, once you grab all the matching money you can, you might want to funnel extra retirement money into other accounts for a while. Maxing out your IRA contribution limits can be a good idea, for example, before you try to reach your 401(k) contribution limits.
Learning the basics of retirement planning can help you achieve a comfortable and secure retirement. To that end, The Motley Fool is here to help!
