If you’re all about saving for retirement and putting away as much as you can, we’ve got some good news.
For the 2019 tax year, you can contribute $500 more to your 401(k) and individual retirement account (IRA) than you were allowed to in 2018. And the 401(k) limits are even higher for 2020.
New 401(k) and IRA Contribution Limits
For 2019, the IRS raised the personal 401(k) contribution max from $18,500 to $19,000 annually. If you’re 50 or older, you can put in another $6,500 in what’s known as a catch-up contribution — up from $6,000 in 2018.
The annual contribution max for IRAs also increased, from $5,500 to $6,000. The IRA catch-up contribution max is $1,000. These limits apply to all your IRAs. So if you have a Roth and a traditional IRA, your total contribution to both cannot exceed $6,000 (or $7,000 if you’re over 50).
You can make those contributions up until the filing deadline for that year’s taxes. So even after New Year’s has passed, you can still put money in your retirement accounts for the previous year.
For 2020, individual 401(k) contribution limits jumped another $500.
That makes the regular maximum $19,500, plus an extra $6,500 in catch-up contributions. IRA contributions did not change for 2020.
But let’s be real. Not many of us are putting away that much money. If you get paid every two weeks, you’d looking at more than $1,000 taken out of each paycheck in order to max out your 401(k) and IRA.
Another way to look at it is that if you make $125,000 annually, you could stash a full 20% of your paycheck. What would that add up to, you ask?
If you were to start with no money and saved this much each year for 35 years, you’d have $665,000 before interest in your 401(k) and $193,000 before interest in your Roth IRA. Factor in a modest 6% return on investment, and the combined number jumps to just under $3 million. That’s a nice little chunk of change for your golden years.
But let’s face it: Most of us don’t earn $125,000 a year and don’t put 20% of our salaries in our retirement accounts. The trick is to not dip into your retirement savings before you retire.
Contribute as much as you can to your 401(k) without putting your financial health at risk. A good starting point is to see how much your employer matches and try to at least hit that number. Here’s a simple 401(k) guide to get you started.
And if you haven’t yet, open traditional or Roth IRA and start paying yourself in retirement. You’ll be so glad you did.
Tyler Omoth is a former senior writer at Codetic.