For the second year in a row, the IRS has increased the retirement savings opportunities for American taxpayers. From 2009 through 2011, the maximum contribution to retirement accounts — 401(k) accounts, 403(b) accounts, most 457 plans, and Thrift Savings Plans, was $16,500. In 2012, this amount increased to $17,000. Thanks to inflation and cost-of-living increases, this year’s maximum contribution to these retirement savings accounts will be $17,500.
Savers and investors aged 50 or older can take advantage of a catch-up contribution, increasing this limit. In 2013, taxpayers who meet this age-based criterion can contribute an additional $5,500 above the regular maximum of $17,500. This catch-up contribution is not changing from 2012. As a result, if you are 50 or older, you can contribute a maximum of $23,000 into these tax-advantaged accounts.
The total contribution limit, including employer contributions, has increased from $50,000 to $51,000.
In addition to the changes to contribution limits, new regulations are requiring 401(k) plan administers to explicitly state in quarterly statements how much investors are paying in fees. Previously, this information was not easy to discover. While you could (and should) look at the various prospectuses in search of management expenses fees or expense ratios, expressed as a percentage of assets, there were at least two obstacles:
- The expense ratios force you to do your own calculations to determine how much money you’re spending in fees.
- Not all fees are included in expense ratios. Some funds, like annuity-based mutual funds, don’t have expense ratios but certainly have fees.
To maximize your 401(k) contribution in 2013, spread the $17,500 across the number of paychecks you plan to receive throughout the year. That’s a contribution of $1,458 (rounded to the nearest dollar) each month, $729 twice a month, $673 every two weeks, or $337 a week for those age 49 or younger.
If your contributions are recorded in the form of percentages, don’t forget to change your contribution to take into account raises and bonuses. If you are expecting your company to match your contributions at some level, if you reach your 401(k) contribution limit before your last paycheck, you may miss out on free money.
This past year, I was for about half the year an employee of a company, during which time I faithfully contributed a portion of my income to a 401(k). For the remainder of the year, I have been and will continue to operate this web site as a consultant for that company, and I have not been contributing to a tax-advantaged retirement plan during that time. Assuming no financial tragedies and modest desires, my retirement needs are met, though I’m not sure what I want my retirement to look like.
In 2011, I worked fully for myself. Without an employer, I had no access to a regular 401(k), but I did initiate an Individual 401(k), which follows the same rules. By the end of the year, I expect to have maximized the employee portion of my 401(k) contributions at $16,500 with extra invested for the employer portion.
My 2010 contributions fell short from the maximum by about $700, and a portion of that is due to leaving the company in the middle of December. I received the full company match, a 100% match on the first 4% of my salary that was contributed to the plan, in every pay period.
In 2009, I contributed the maximum $16,500, but I didn’t plan for an extra paycheck at the end of the year, so that last paycheck did not include a contribution to my 401(k). As a result my imperfect calculation, I missed out on a portion of my employer’s matching contribution. Some employers match after taking all contributions for the year into account, but mine contributes on a pay period basis. Any pay period that I did not contribute to my 401(k), the company did not match.
In 2008, I missed the full contribution amount by $1,000. That year, I made several changes to my contribution rate and lost track of what my rate needed to be in order to maximize my contribution.
The following table illustrates the change in 401(k) contribution limits over the past several years.