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6 Reasons For Making Your 401k Contribution Limits

401k contribution limits

Your 401k Contribution Limits Count401k contribution limits

Learn About 401k Contribution Limits

With everything you have to worry about why would you care about 401k contribution limits? Well, why do you invest into your retirement account? Most likely because you do not want to work forever. Someday you want to retire, right? The reason you put money into any investment is to secure your financial future. The real purpose of 401k retirement accounts and Individual Retirement Accounts (IRA’s) is to enable you to take care of yourself during your retirement years.

If you have saved enough money during your working years then when you are ready to retire you will be retiring financially independent. Isn’t that what you want? Don’t you want to be financially independent when you stop working? Who wants to move in with their families when they retire? Who wants to spend their retirement years financially restricted? When you reach retirement age you probably do not want to work, at least full-time. You most likely want to travel more, see your family and friends more, have fun with your hobbies or get involved with your favorite charity.

Most people will spend 20 years of their life in retirement. That is a very long time. Will you have enough money? The way to prepare for a financially strong retirement is to optimize your retirement savings during your working years. The best way to do that is to maximize your retirement account contribution limits every year.

Start By Optimizing Your Retirement Savings

Your 401k Contribution Limits

  • Invest up to the maximum 401k contribution limits every year
  • For 2015, the 401k contribution limits are $18,000
  • If you are over the age of 50 you can also take advantage of the catch-up contribution limit which is an additional contribution of$6,000
  • The 401k contribution limits and catch-up contribution for 2016 are the same as 2015

Your IRA Contribution Limits

  • If applicable, also maximize your Individual Retirement Account contributions every year
  • For the year 2015 the Individual Retirement Account contribution limits are $5,500 with a catch-up contribution of an additional $1,000, if you are over the age of 50
  • For 2016 the Individual Retirement Account contribution limits are the same as 2015

What You Get By Maximizing Your 401k Contribution Limits

#1 – You get more free money from matching

Who can turn down free money? If your employer matches your 401k contributions you get free money. When you maximize your 401k contribution, you increase this employer match. An increased match means you get additional free money from your employer.

#2 – You get to reduce your taxable income

Retirement contributions will decrease your taxable income. Your 401k and Traditional IRA contributions decrease the amount of income that you have to report on your taxes for the year you make the contributions. This decrease of taxable income reduces the total amount of income taxes you pay for that year. Who doesn’t want to decrease their taxable income?

Roth IRA’s do not offer the same pre-tax advantages as a Traditional IRA does. Roth IRA’s offer post-tax advantages.

#3 – You get other tax benefits

Your contributions and the earnings on your 401k investments will grow tax-deferred. The reason that tax-deferred investments grow more is because your money is in the market longer. With a tax-deferred investment, all of your money is working for you. In other words, you are not taxed on your contribution money until you withdraw it at retirement. The second advantage of tax-deferred investments is that at retirement you will be in a lower tax bracket, therefore pay even lower taxes on your 401k contributions.

#4 – You get to benefit from the magical effect of compounding

Compounding is an investors best friend. Compounding is simply growth earned on growth. When your 401k account balance grows, your account has a new value. Compounding is where future growth accumulates from that new account value. Compounding takes into effect the time value of money. The longer your money is in the market the more effective compounding becomes.

#5 – Will there be any Social Security in the future?401k contribution limits

Your best financial move is to rely upon you and only you to fund your retirement. Do not plan on Social Security being there for you.

You can never save too much money. If you save enough money for retirement you will not need to worry about if Social Security will be available or not. Yes, you are paying into Social Security; but sorry, the Social Security fund will not have enough money to pay for your retirement, so plan accordingly.

#6 – You will need every penny of your 401k contributions when you retire

The only amount of money that will be there when you retire is the amount you sent ahead. You either pay now, or pay later by working. If you did not save enough during your working years, when you retire, you will have to keep on working. If you maximize your 401k contributions and IRA contributions every year that you are working, you should be sending enough money ahead to have a splendid retirement.

When 401k plans were first introduced in the early 1980’s some say that they were developed due to the realization that someday Social Security would not be able to support all American workers at their retirement. Others said that 401k plans were created because American corporations could not afford to fund pension plans anymore. Who cares why 401k plans were invented. The fact is that the burden and responsibility to save for retirement has shifted to YOU.
Your retirement years can be so relaxing and enjoyable, but only if you prepare and plan for it. Make this the year that you focus a bit more on retirement planning. Try increasing your 401k contribution by just 1% every year. You will be amazed on the big impact that small contribution makes on your retirement balance and the little effect it has on your paycheck. You do not have to make dramatic changes to find that extra 1%. Believe it not you can find it by changing some of your other financial habits. Maybe go out to eat one less time every week. Maybe skip the coffee shop one or two times a week. It’s that easy. Try it.


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