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So you’re in your 40s or 30s and you’ve had a steady job for over a decade or two. Or even better, you’re in your 20s and have a job with benefits and sort of, kind of, maybe figured out what you might want to do with your life for the next few years.
That’s all well and good, but what are you doing for your retirement savings? Do you know what your contribution amount is and if there’s a matching plan at the company you work for?
It seems ridiculous and a little crazy to start thinking about this stuff when you’re in your 20s but it’s not at all. You need to know the contribution limits for 2019.
To give you perspective, here are the average retirement savings for the following age groups:
- Age 32-37: $31,644
- Age 38-43: $67,270
- Age 44-49: $81,347
- Age 50-55: $124,831
- Age 56-61: $163,577
That’s not even close to getting the job done. The reality is people aren’t saving nearly enough to have a comfortable retirement, if one at all. Knowing what are the contribution limits for the year is one of the most important things to keep in mind as you move along in your career.
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Here is what are the retirement contribution limits for 2019
401k Contribution Limit
The 401k contribution limit for 2019 is $19,000. Now that may sound like a lot, but if you’re fortunate enough to be making six figures, it’s not as much of a sacrifice as you’d think. Let’s say you make $120,000 and have a matching plan of 50% up to 6%, so in total, you get a 9% contribution to your 401k plan. That’s $10,800 so you would only have to sacrifice an extra $8,200. That’s just an extra $315 per paycheck if you’re paid biweekly.
Roth 401k Contribution Limit
A Roth 401k has the same exact limit. The amount you’re allowed to contribute doesn’t differ between a 401k and Roth 401k plan. The only catch is your employer may not offer a Roth 401k plan. Lots of companies do, but it’s still a relatively new concept in the grand scheme of things. Either way, if you can contribute $19,000 to your Roth 401k plan, then do it.
Not taking into consideration before-tax or after-tax for simplicity’s sake, here’s what $19,000 invested in an S&P 500 index fund for 40 years looks like:
It’s a tough concept to grasp, but that’s the reality of it. The first 18 years don’t look like much, but then 22 years from then, you’re at $8.4 million.
Total 401k Contribution Limit (Employer + Employee)
Now, most people don’t realize this, but the $19,000 contribution limit only applies to the employer limit. So what this means is, the limit your job is allowed to contribute to is $19,000, but you yourself can contribute more. It’s confusing because the way the rules are worded makes it seem like that’s the total maximum amount you can contribute.
The real total contribution limit you can make is $53,000 but if you’re 50 and older, you can contribute $59,000. It’s tough to do because you need a seriously high salary. And people who make that much probably don’t have to worry about retirement savings, so the issue never really comes up. For example, if you make $700,000 a year and have a matching plan of 50% up to 6% contribution, then you would hypothetically have in total $63,000 in 401k savings ($19,000 + $42,000). But since the limit is cut off at $53,000, you’d have to subtract $10,000. Regardless, just to show you how effective compound interst is, here’s what the total amount looks like saved every year for 40 years in an S&P 500 index fund:
IRA Contribution Limit
Now the IRA contribution limit is significantly less. Why? Not sure. I personally think it’s to limit your savings rate so you can spend more to keep the economy afloat. But that’s just me.
The maximum IRA contribution limit for 2019 is $6,000. Not even a third of your 401k limit, but it’s better than nothing. Personally, I don’t let that stop me. I use my equities in my brokerage account to supplement it. Never let a financial advisor convince you the only two vehicles for retirement are your 401k and IRA. If you want to really boost it up a notch, use your brokerage account as well.
Roth IRA Contribution Limit
Likewise, for the Roth IRA contribution limit, it’s $6,000. The only difference is this money will be taxed up-front instead of later down the line, which we mentioned before that if you think you’ll be making more money in the future, you should tax yourself now instead of later.
Roth IRA Income Limit
Unlike the 401k, Roth 401k and IRA however, there is an income limit. Again, I think it’s just to keep the economy going to try to force people to spend more instead of save more, there’s no other reason I can think of. The income limit for an IRA is $137,000 if you’re single and $203,000 if you’re married. So basically I have until next year until I can’t contribute to a Roth IRA anymore.
Regardless, if you can contribute $6,000 every year for the next 40 years in either a Roth IRA or an IRA, not taking into account pre-tax or after-tax dollars, here’s how much you could save:
Catch Up Contributions
Catch up contributions are granted to you after you turn 50 years old. That may seem like an eternity away, but it’s still good to know for the future. You can contribute up to $1,000 more to an IRA, bringing the total to $7,000.
For a 401k plan, you can contribute an additional $6,000 to your contribution plan.
So let’s say for the next 18 years, you contribute up to the maximum catch up contribution limits for a total of $7,000 and $25,000.
This will turn into the following if invested in an S&P 500 index fund:
And again of course, this gives you a small timeline and less likely a chance the return will be 10%, but this is just a demonstration to show you the effect compound interest can have.
Solo 401(k) contribution limits for the self-employed
For those that choose the entrepreneurial route, if you’re lucky enough to be in the 10% of companies that don’t flounder, you’re in luck. If you’re able to afford it, you can’t contribute up to a maximum of $56,000 per year or if you’re 50 years or older, you can contribute up to $62,000.
That’s a ridiculous amount of money. For some people, that’s twice the amount of their annual salary. Obviously, you’d be insanely fortunate to be able to save that much for 40 years, but just to show you how effective compound interest is, here’s what $56,000 saved for 40 years turns into saved in an S&P 500 index fund:
Overall, if you hypothetically were working at a job for an employer and were able to contribute the maximum amounts for 40 years, you would have about $13,415,925. All you had to do was pay attention to your contribution limits. You didn’t have to care what the markets were doing, what the bond rates were, you just had to sit back and relax.
So now that you know what the contribution limits are, go get started. Check your contribution rate. If you can max it out, great, if you can’t, no problem but do the best you can. I can’t max out my contribution limit anymore, but based on what I’ve saved to date and the retirement savings my fiance and I are putting away each year ($27,450 total in Roth 401k plans), we could potentially end up with $19,943,103 just from playing it simple with an S&P 500 index fund.
And the bright side is, the contribute limits keep increasing over the years, so it will probably be even greater.
So get started today and check what your contribution limits are and see if you can push yourself to do even better.
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