Basics of a 401k – 2018 401k Contribution Limits and Guidelines

Updated : Sep 09, 2019 in Articles

Basics of a 401k – 2018 401k Contribution Limits and Guidelines


what is a 401k and how does it work a
401k is an employer-sponsored qualified retirement savings account there are a
few different types of 401k plans and investment options can vary from
employer to employer so there are three main benefits of 401k plans first when
you make deposits often called contributions to your 401k plan
well these contributions are made before taxes are taken out this means that your
federal taxable income that this year will be lower and many times state taxes
are also reduced thanks to these contributions second
your contributions grow without being taxed this means that any taxes you
would have paid on a typical investment account can now be reinvested tax-free
making the power of compounding work even harder for you and third many times
your company matches at least a portion of the contributions you make to your
401k plan these three benefits make 401k plans truly unique and powerful
essentially you pay less taxes this year your account gets to grow without taxes
getting in the way and your employer may give you essentially a retirement raise
by often matching at least a portion of what you put in one of the more popular
forms of matching is for the employer to contribute 50 cents for every dollar you
contribute some companies even match dollar-for-dollar now there are limits
to traditional 401k contributions 2018 limits and 401k employee contributions
went up from eighteen thousand dollars in two thousand seventeen to eighteen
thousand five hundred dollars in 2018 they call this a cost-of-living
adjustment now just because it went up in this example doesn’t mean that it
will go up every year the eighteen thousand dollars from last year was in
place since 2015 now this is the employee contribution limit this does
not take into account employer matching the actual limitation for total
contributions in 2018 was increased to fifty-five thousand dollars from $54,000
in 2017 so we take the current total contribution limit of fifty five
thousand dollars and we subtract the employee contribution limit of eighteen
thousand five and we see that there is room for
another 36,500 this could come from employer matching or maybe your company
has some sort of profit sharing contributions now there’s also something
called the ketchup contribution that most 401k plans allow this ketchup
contribution was put in place to allow for baby boomers to catch up on their
retirement savings in 2018 if you’re turning 50 within the calendar year you
are eligible to contribute an additional $6,000 to your 401k plan there are some
nuances to this rule but broadly speaking 6000 is the limit and that is
on top of the 2018 limit of $55,000 so should you contribute to your 401k plan
and how much well knowing that every situation is different and every
employer is different the most accurate answer is well it depends on your
individual situation but broadly speaking it makes sense for most people
to contribute every year how much well as much as I can going back to the three
benefits we mentioned before well if a company matches your contributions well
you want to get as much of that money as possible here’s an example if you had
zero in your 401k right now and you were going to contribute the eighteen
thousand five hundred uh limit every year for the next twenty five years
assuming the limit never went up and that money was going to grow by let’s
say five percent per year well at the end of the twenty five years
your accountant be worth a bit over nine hundred and twenty seven thousand
dollars but if your employer put in just 50 cents for every dollar you put in all
else being the same your account would now be worth about one point three nine
million that’s more than a four hundred and sixty thousand dollar difference so
if it’s being offered to you why wouldn’t you take it now let’s imagine
that your employer doesn’t match it all well the fact that your yearly taxable
income is lowered and you get to invest that money without worrying about tax is
getting in the way well once again it’s free money why not take it so what is
your 401k investing once again this depends on your employer oftentimes
you’ll see a few investment options you might see equity funds which invest in
stocks bond funds which you may have guessed invest in bonds balanced funds
this is usually a combo of both stocks bonds and sometimes cash international
funds perhaps they offer emerging markets or developed markets generally
each fund will describe their offering what
invest in and oftentimes the general risk level will be spelled out for you
generally it makes sense to consider how long you’re going to be investing in the
account and then choose the investments accordingly if you have any questions
about the world of investing any suggestions on videos please post in the
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3 Comments

  • my employer matches 5% which isn't much. I'd much rather have a pension and a union. I'm seriously thinking of leaving my job for a slightly lower paying job with a nice pension.

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