2013 401(K) Contribution Limit Is $17,500

If you are a participant of an employer sponsored retirement plan, such a 401(K) plan, then there’s a good news for you to save more for your future retirement. Starting next January, you will be able to put $500 more into the plan than what you can contribute this year.

The IRS announced yesterday that for 2013 the tax-free contribution limit to 401(K) plans will be increased to $17,500, up $500 from the current limit for 2012. For employees age 50 and older, the catch-up contribution limit, however, will remain the same as this year at $5,500.

For us, we have contributed to the maximum amount allowed in our 401(K) plans for years because the benefits of doing so are for both the future and the present. For the future, since neither of us has a pension and what is going to happen to Social Security is such much unclear, putting money in retirement savings accounts, such as 401(K) and IRA accounts, is the only way for us to prepare for our retirements in the future. As for the present, the benefit is that the tax-free contributions to 401(K) plans lower our current tax bills, translating to saving us money right now. Therefore, whenever circumstance allowed, both of us contributed close to the limit as soon as possible early in the year and only left a small portion for the rest of the year in order to get the employer matches because there will be no match if there’s no contribution.

Since the Pension Protection Act became law in 2006 allows employers to automatically enroll their new employees into 401(K) plans, there are studies¬†showed that plan participants have increased, even when the default contribution rates for many employers were set to 3 – 5%. With that automatic contribution rates, workers might not be able to take full advantage of the tax-free contribution limit, but I still think it was a good starting point to at least get them some free money from their employers’ match contributions.

Of course, with employer sponsored defined contribution plans like 401(K), we usually don’t have the luxury of choosing how to invest the money since the investment choices are limited by the plan sponsor. Even in that case, it’s still important to pay a closer attention to how much some of the investment options cost in the long term. Early, I have discussed a free 401(K) fee analyzer from Personal Capital. Though the tool is not perfect as I mentioned in the post, it still can give you an idea on how much you pay in fees (such as mutual fund expenses and other administrative fees). If you are paying too much for your current investment selections, may be you can see if your plan offers other alternatives to lower your overall costs.

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