401k Contribution Limits for 2015
A 401(k) plan is a tax qualified retirement savings plan that is contributed to by your employer. Employees can save and invest a portion of their paycheck into the 401(k) account before taxes are taken out. This serves two beneficial purposes: to potentially bump them down a tax bracket and to provide their savings compounding interest for many years with delayed taxation. The earnings from investing in a 401(k) are also tax deferred.
A benefit of the 401(k) is that the investor is allowed control of how their money is invested. Most 401(k) plans offer a selection of mutual funds comprised of securities such as bonds, stocks and other assets. However, the most common option are Target-Date Funds. Target-Date Funds address some date in the future, usually retirement in order maximize investment returns. It is structured to gradually become more and more conservative as the investor reaches retirement.
The 401(k) plan is full of restrictions. For the most part, investors must work for their employer for a certain amount of time before they can gain access to their employer’s contributions. Usually employers match 3% of their employees’ salary for their 401(k) contributions. The best plan is to at least invest enough to get the full amount that the company matches. Other restrictions include early withdrawal penalties (usually 10%) which penalize for withdrawing money before retirement.
However, there are a few emergency withdrawal options:
• Hardship withdrawals
• Loans
• 72(t) withdrawals
Generally speaking, there are only these three emergency withdrawal options. Hardship withdrawals are allowed for certain qualified hardships. Unfortunately there is usually still a withdrawal penalty and taxes owed on these withdrawals. Loans against the 401(k) are usually allowed as long as the loan is repaid with interest. 72(t) withdrawals are withdrawals that are usually allowed based on an individual’s life expectancy. These withdrawals eliminate the 10% early withdrawal penalty and require that withdrawals must be taken for at least 5 years or until the age 59 and a half has been reached. Taxes still must be paid on the amount withdrawn, however.
There are two 401(k) options offered, the traditional and the Roth. The main difference being that the Roth 401(k) is comprised of contributions that have already been taxed and thus no taxes are paid upon withdrawal. The Roth also usually has more flexibility in accessing money invested.
In October of 2014, the IRS announced that adjustments to retirement plans that affected the dollar limitations had been made. The adjustments for the 401(k) plan are as follows:
• Elective deferral contribution limit was raised from $17,500 to $18,000
• Employees aged 50 or older can contribute a total of $24,000
• The total contribution limit to a 401(k) by both the employer and employee was raised to $53,000
• The total contribution limit to a 401(k) by both the employer and employee aged 50 or older was raised to $59,000
• The total employee compensation that can be considered for calculation contributions was increased from $260,000 to $265,000
• The highly compensated employee definition was raised from $115,000 to $120,000
Overall, contribution to a 401(k) is a great investment option for anyone who is concerned about having enough money once retired. Always remember to try to make the maximum contribution to the 401(k) each year and to at least contribute enough to get the full amount that the company matches.
