Are You Making The Maximum 401(k) Contribution?

max out your 401k

Are You Making The Maximum 401(k) Contribution?

Saving for retirement can be a challenge for everyone at times. Luckily, the government has given us the opportunity to save and invest for our retirement in a tax advantaged manner.

One of the most common ways to do so is the 401(k), a retirement plan that many employers offer their employees as a benefit. Unfortunately, many people never make the maximum 401(k) contribution and they could be leaving money on the table.

What Is The Maximum 401(k) Contribution For 2015?

In 2015, the maximum 401(k) contribution is $18,000 for people under 50 or $24,000 for people aged 50 or older. The limits are the same for the Roth variant of 401(k)s.

While that may seem like an impossibly high amount to save or invest for retirement, it is possible to make it happen if you decide to put your mind to it.

How To Invest the Maximum 401(k) Contribution

You’ll need to know three numbers to calculate how much you need to invest to reach the maximum 401(k) contribution in 2015. The first is what your maximum contribution limit is from above. The second number is how much you’ve already contributed to your 401(k) so far in 2015. The final number is the number of paychecks you’ll receive for the rest of the year.

Take the amount you’ve contributed so far and subtract it from your 401(k) contribution limit. This will give you how much money you still have to contribute to hit the maximum in 2015.

Next, take the amount you calculated in the step above and divide it by the number of paychecks you have remaining in 2015. This will give you the amount you need to contribute per paycheck to hit the 401(k) limit this year.

All you have to do is get your human resources department or 401(k) administrator to change your per paycheck 401(k) contribution to match the number per paycheck that you calculated and you’ll be set.

Ways To Adjust To Your New 401(k) Contribution

Suddenly jumping up to the maximum 401(k) contribution limit can be a shock to your paycheck.

One way to adjust to the new limit is to slowly increase your contributions until you hit the amount you would need to hit the maximum in a typical year. You can start at as little as 1% per paycheck and increase by 1% each subsequent paycheck. If that pace is too fast, you can increase you contribution by 1% a month until you hit the limit.

If that doesn’t sound like it will work for you, another way to increase your 401(k) contribution percentage is to increase it by the amount of your raise each year. Since you never had the raise money in your normal paycheck, you won’t miss it.

In addition, since 401(k) contributions come out before taxes, you won’t have to pay any federal taxes on your raise, either. This method is much slower than increasing your contribution rate each paycheck or each month, but it eventually gets the job done just the same.

Make Sure To Keep Up With The Maximum 401(k) Contribution

The Internal Revenue Service (IRS) is responsible for updating the 401(k) contribution limit every year to adjust it for inflation. You’ll need to make sure you keep up to date with this information each year if you want to continue contributing the maximum amount each year.

In general, the IRS will increase the limit between $500 and $1,000, but in some years the IRS doesn’t increase it at all if there was no inflation. The catch up contribution limits for those 50 and over are also adjusted for inflation which can give you the opportunity to save even more money for retirement in tax advantaged accounts.

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Lance Cothern
Lance Cothern loves everything personal finance and has his own blog exploring his thoughts on the subject at MoneyManifesto.com. Together with his wife, they've paid of over $80,000 in student loans on their way to financial success! In addition to his blog, you can connect with him on TwitterFacebookPinterest or Google+.