IRS Boosts Limits for 401(k) Contributions

If you’ve been wanting to sock away more money in your workplace retirement savings plan, next year’s your chance.

This morning the Internal Revenue Service announced that next year’s contribution limits will go up by $500, to $18,000 for 401(k)s, 403 (b) plans at nonprofits and most 457 plans offered by state and local governments, as well as the federal government’s Thrift Savings Plan.

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Workers ages 50 and older are entitled to make extra contributions to these accounts. The annual limit on these so-called catch-up contributions also will go up by $500 next year, to a total of $6,000.  This means that older workers could salt away as much as $24,000 a year in a 401(k) or similar plan.

However, the maximum annual contribution for individual retirement accounts will remain the same, at $5,500. And the catch-up contribution limit for an IRA will stay unchanged at $1,000 next year, bringing the total amount older workers can set aside in this account to $6,500.

Contribution limits are tied to inflation and are reviewed annually. Last year the Consumer Price Index had not risen enough to trigger an increase in 401(k) and IRA limits.

Of course, even though workers will be permitted to save more in their 401(k) or similar workplace plan, it’s likely that most of them won’t take advantage of it, given that they don’t max out contributions now.

A report by the Center for Retirement Research at Boston College released last month found that only 12 percent of participants in 401(k)s administered by fund giant Vanguard put away the maximum amount. And those most likely to contribute the maximum earned at least six figures.

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Even if you can’t afford the maximum, increasing contributions annually can make a big difference in retirement. To find out, use this AARP  401(k) calculator to see how your contributions — and increasing them — can add up over the years.

Photo: JasonYorkPhotography/iStock

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