The maximum amount of money that can be contributed to your 401k plan is limited by the IRS to a level that changes every year. However, this doesn't necessarily put a cap on how much you can save for retirement.
Source: 401kcalculator.org via Flickr.
There are other places to stash money for your retirement, and some might even be better options than maxing out your 401k contributions. Here is a quick guide to the 401k 2014 contribution limits and some alternative options for those leftover investment dollars.
The limits are generous, but some people might want to save more
There are two separate limits on 401k contributions: how much you can contribute and the total amount that can be deposited during the year.
For the 2014 tax year, the limit on elective deferrals is $17,500, with an additional $5,500 allowed if you're over 50. These are just the maximum amounts allowed by the IRS. Your plan might have its own (lower) limits on how much money you can contribute.
The current annual contribution limit is $52,000 ($57,500 if over 50), which includes your elective deferrals, any nonelective contributions (contributions you are required to make), and any matching contributions from your employer.
However, only workers with extremely generous matching programs can get near the total limit. The elective deferral limit is the number to pay attention to here, because it's the one you can control.
Next, consider an IRA
Maybe setting aside $17,500 per year for your retirement isn't enough for you, especially if you got a late start on your retirement savings or hope to retire early. If this is the case, the next logical option is to put some money into an IRA. In fact, you might want to do this even if you don't anticipate running into 401k limit issues.
IRAs come in two basic varieties: traditional and Roth. Both accounts allow an annual contribution of $5,500 for the 2014 tax year ($6,500 if you're over 50).
A traditional IRA lets investors contribute money on a tax-deferred basis, meaning contributions might be deductible on your 2014 tax return. However, if you have a 401k plan at work, the tax advantages associated with a traditional IRA might not apply to you. Check the IRS' guidelines to determine whether you can deduct traditional IRA contributions.
Because a traditional IRA is similar to most 401k plans in terms of deferred taxation, a Roth IRA could be a nice way to get the best of both worlds. Contributions to a Roth IRA are made on an after-tax basis, but investments are allowed to compound tax-free, and qualified withdrawals are also not counted in your taxable income. Here is a more complete description of traditional IRAs versus Roth IRAs.
Perhaps the most compelling reason to consider an IRA, whether or not you hit the 401k limit, is investment flexibility. With a 401k plan, your investment choices are generally limited to a small basket of funds. With an IRA, you are free to invest in pretty much any stock, bond, or fund you want to. So, if you want to choose your own stocks and other investments, an IRA is definitely worth considering.
A regular brokerage account might not be so bad
Another thought is opening a traditional, taxable brokerage account for some of your money. While this account type clearly has some disadvantages for long-term savers (mainly taxes), the flexibility can make it a good choice for some of your savings.
For starters, if you need your money before reaching retirement age, you can withdraw from a brokerage account without worrying about paying a penalty to the IRS. With a 401k or traditional IRA, you could be hit with a 10% early withdrawal penalty for taking your money out before age 59-1/2.
If you plan to retire early, having some money outside of traditional retirement accounts is a must. First of all, one of the best benefits of 401ks and IRAs is tax-free compounding, so you want to take advantage of that for as long as possible. Also, if you retire at, say, 50, you don't want to have to pay a penalty just to access your own savings.
Save early and often
Finally, the best way to make sure the 401k 2014 contribution limits don't become a problem is to start saving as much as you can, as soon as you can.
Consider that based on the average total return of the S&P 500 over the past 20 years, it would take annual savings of about $6,000 to save $1 million in 30 years. However, if you only have a 20-year time frame to achieve this, the annual contribution amount jumps to $16,000 -- right on the edge of the elective contribution limit.
Start saving early and set aside as much as you can reasonably afford. It will make reaching your goals so much easier in the long run.
