internal revenue code Archives - Faithful with a Few

Below you will find the 401k Contribution Limits for employees, employers, and also for participants who will be at least 50 years old by the end of the calendar year. You should also consult the IRA contribution limits before completing your retirement plan.

	2016	2015	2014
401 (k) Contribution Limit	$18,000.00	$18,000.00	$17,500.00
401 (k) Catch-Up Contribution Limit	$6,000.00	$6,000.00	$5,500.00

401 (k) Contribution Limit for Those Over 50	$24,000.00	$24,000.00	$23,000.00

401 (k) Employer Contribution Limit	6.0%	6.0%	6.0%

As you can see, there was no cost of living adjustment from 2015, meaning that the 401k contribution limit for 2016 has stayed the same since last year.

As in previous years, plan participants who will be 50 years of age by the end of the year will be able to make a “catch-up” contribution. The catch-up contribution is an additional amount that those close to retirement are allowed to make. As you can see, the catch-up contribution limit will continue to be $6,000 for calendar year 2016.

Also note that the employer 401k contribution limit remains at 6% of the employee’s pre-tax salary. What this means is that an employee that has a gross salary of $100,000 will be able to contribute up to $18,000 during the year. If they will be at least 50 years old by the end of the year, they will be eligible to make a catch-up contribution up to $6,000; bringing their total annual contribution to $24,000.

If they contribute enough to gain their full 401k employer match, then their employer will kick in an additional $6,000 toward the employee’s retirement. This means that the employee in our example will put away $30,000 this year for retirement!

I’ve talked before about contributing enough to qualify for your full 401k employer match, so be sure to read that article to see why it is so vital to your financial health. Basically, I show how you can earn a return of 167% on your 401k before you begin investing!

With this type of return, and the generous amounts that we are allowed to set aside, contributing to a 401k should be at the top of your list of New Year Resolutions!

photo by MJTR

There are many things that we do in life that revolve around money. Much of the time we are working hard to earn more. Unfortunately, this desperation surrounding money doesn’t carry over to claiming our 401k employer match. People will do things out of character, work past the point of exhaustion, and even fall for obvious scams, all in pursuit of money.

Turning Down Free Money?

However, it seems like many of us are passing up free money with every paycheck! According to a recent study by Financial Engines, “39 % of [401 (k)] participants [are] not saving enough to receive the full employer match”! One of the most basic things that you can do is to quality for your 401k employer match.

The situation looks even worse for younger workers. The study reports that, “of participants under age 40, 47% failed to save enough to receive the full employer match.”

Most companies that offer 401 (k) plans will also offer a 401k employer match. What this means is that these companies will match the amount that you put into your plan up to a certain percentage of your salary. Let’s look at an example:

Let’s assume that your gross salary is $52,000 and you are paid every two weeks.You employer promises to match any contribution that you make to your 401 (k) dollar-for-dollar (100%), up to 6%!

You have more pressing concerns than saving for retirement, so you decide to start off slow at 1%. That means that with each paycheck you put aside $20 for retirement, and your company matches – giving you a total of $40!

Sounds pretty good, right? However, you just threw away $100 of FREE MONEY!!! How? Well, let’s take a look:

If you contributed 6% instead of just 1%, then your employer would match your $120 with $120 of FREE MONEY! Sounds a lot better than $20, huh? So, failing to contribute enough to receive the employer match (and only saving 1%), costs you $2,600 per year! Even more if you get a bonus, raise, or commissions!

I don’t know about you, but I would hate to have someone offer me $2,600 and I just light it on fire.

So, I guess you can see that I am in favor of everyone contributing enough in their 401 (k) plan to get the full employer match. If not, then you’re turning down FREE MONEY!!!

Actually, I’d go a step further and have every employee automatically signed up to contribute that amount, and have to opt out in order to change it. That would cause a lot more people to be aware of what their negligence costs them!

Want The 401k Employer Match, But Can’t Afford to Reduce Your Take Home Pay?

Keep in mind that a contribution to a traditional 401 (k) plan is made with pre-tax dollars. That means that taxes are not taken out of your pay until AFTER you make your contribution – leading to you paying less taxes!

Taking this example a little further will help us see this more clearly. Remember that I am making a few assumptions about your tax status in order to simplify the example:

Let’s say that your net pay is usually 25% lower than your gross, or $1,500. Contributing 6% of your salary ($120) will reduce your net pay to $1,410. This is a reduction of only $90 instead of the full $120 that you saved.

Actually, you managed to save $240 for your retirement by reducing your take home pay by only $90! That’s a return of 167% before you even started investing!!!

Is A 410k Employer Match In Your Future?

I hope you’ve read enough to convince you to take full advantage of your company’s 401 (k) match. The only thing worse than not getting the full match is using your 401(k) for credit card debt! Of course, in order to plan carefully you need to know the current 401k contribution limits, and even consider the prospect of a 401k rollover!

photo by AMagill

Reader Questions:

Does your employer currently offer a 401 (k) plan?
If so, are you contributing enough to get the full employer match?
If you are contributing less than that, what’s your reason?