This article was last updated on January 5
The IRS has provided a $500 increase in tax deductible 2013 401(k) and IRA contribution maximums. Employer sponsored 401k plan contribution maximums have risen from $17,000 to $17,500. IRA limits have risen to $5,500 from the 2012 maximum of $5,000. These increases may not seem like a lot at first glance but over a number of years with the effect of compounding, the higher contributions can make quite a difference. As the table below shows a $500 increase in annual 401K or IRA contributions for a 30 year old can make a $65,000 difference at retirement! The calculations shown in the table make a few simplifying assumptions like contributions stay constant, but the key takeaway is that even a relatively small increase in your annual retirement contribution makes a huge difference when you retire. [See more @ Are you saving enough for retirement?]
In fact if you increased your contribution from $10,000 to $16,500 (2011 401k limit), you will have nearly $850,000 more at age 70 1/2 when you must start taking withdrawals from your retirement account. Another thing to takeaway from the table above is that the sooner you start making contributions the bigger the impact. Contributing with every paycheck, as you do in a 401k account, isn’t necessarily the most-profitable or sexiest way to invest, but it’s a good discipline that helps smooth out the impact of buying in a volatile market. This has been underscored over the last few years for anyone who kept contributing to their 401k or IRA accounts. The above table excludes employer match contributions towards 401k plans, which can further boost retirement savings.
Off course the IRS and treasury realize that if people contribute more to their retirement accounts there is less current tax revenue for them (since 401K and IRA contributions are pre-tax). That’s why contribution maximums are carefully controlled and are only increased in small increments. So when ever you get the chance and if you can afford it, it makes a lot of sense to take maximum advantage of this completely legal tax deduction!