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New Contribution Limits Make 401(k) Plans Even More Attractive

Posted January 21, 2015 in Advice Column, Beaverdale

If you are saving for retirement, here’s good news: The IRS raised the maximum contribution limits for 401(k), 403(b) and 457(b) plans from $17,500 to $18,000. If you’re 50 or older, you can put in an extra $6,000, up from $5,500 in 2014.

Although you may not contribute the maximum to your retirement plan, you still benefit from making small increases each year. Unfortunately, many people don’t. Approximately 30% of eligible workers don’t participate in their employer’s 401(k)-type plan, according to the Employee Benefits Security Administration. The median savings rate for these plans is 6% of eligible income, with only 22% of employees contributing more than 10% of their pay, according to a recent report by Vanguard.

You have some strong motivations to put in as much as you can. Your 401(k) earnings grow tax-deferred, which means your money has more growth potential than if it were placed in an account on which you paid taxes every year. You will be taxed on your withdrawals, but by the time you start taking out money in retirement, you might be in a lower tax bracket.

You get a more immediate tax-related benefit from contributing as much as you can.  Suppose that you are in the 28% tax bracket. For every dollar you earn, you pay 28 cents in taxes (excluding state and other taxes), leaving you 72 cents to spend. But if you put that same dollar into your 401(k), which is funded with pre-tax dollars, you will reduce your taxable income by one dollar — so if you did contribute $18,000, you’d save $5,040 in federal income taxes. Your tax situation will likely be impacted by other factors, but you’d have that $18,000 working for you in investments you have chosen within your plan. If you kept contributing the maximum each year, you will be giving yourself potential for a sizable fund for your retirement.

If you don’t “max out” on your 401(k), you should contribute enough to earn your employer’s match, if one is offered. Your Human Resources department can tell you how much you need to contribute to get the greatest match, so if you haven’t had that conversation yet, don’t put it off.

Investing in your 401(k) is a good retirement strategy — you get tax benefits and the chance to build retirement savings. With the contribution limit increasing, you’ve got the chance for more savings.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

Information from Edward Jones, provided by Jim Talley, financial advisor at Edward Jones, 2703 Beaver Ave., 279-4179.

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