As you may have already heard, the 2019 basic contribution limit for 401(K) (as well as 403(b) and most 457 plans) has been increased to $19,000, up from $18,500 last year. Now the question that many of us are asking is, what is the big deal and what do extra $500 in your 401k mean?
Before we get into that specific question, a little bit of background is in order. IRS makes changes to contribution limits to allow for cost of living adjustments that can affect our retirement savings. This means that we get to put away an additional $500 tax-free every year from 2019 until retirement. This may change in future years by IRS.
At the first glance, the $500 a year may not look so significant, so let’s put this in some context. Consider a 30-year old saving for retirement. She can now save an extra $500 per year for the next 35 years. Assuming it grows at 5% every year (which is a conservative assumption), the extra $500 a year would grow to over $50k. If you factor in the employer contribution, the savings would be even more significant. Impressive return for a small change in savings habits. Don’t you think?
Automated? – No, this change is not automatic and requires you to increase your contributions to meet the $19K maximum. So, act on it as quickly as possible.
Next Steps? – consider saving the maximum allowed by increasing your contributions.