The IRS updated key 401(k) contribution limits and there is good news for both employees and small business owners! For employees, you get to save between $500 and $1,000 more each year (depending on if you’re over 50). For employers, the IRS relaxed some rules which may make it easier for small businesses to stay compliant.
The tl:dr version of this post: if you can, take advantage of higher contribution limits and save more.
So what are the 2015 contribution limits?
Why should I care about contribution limits?
Simply put, you can benefit monetarily from knowing your contribution limits, and maxing your savings until you hit those limits. And, you can get dinged for going over your contribution limits. So yes, it’s worth knowing. Luckily, it’s easy to keep track of.
How can I benefit from knowing my contribution limit?
For starters, you can aim to max out your savings right up to the contribution limit. We all know the power of compounding interest. Now you get the power of compounding interest AND tax deferred savings.
Let’s take an example. The IRS increased the limit on employee deferral by $500 this year: in 2014 it was $17,500, in 2015 it’s $18,000. Knowing this, you can increase your savings by $500. Is that a big deal? Yes, it is! An additional $500 saved this year and every year can become around $123,000 in 45 years. The sum of $500 saved every year for 45 years is only $22,500… so we’re making an additional $100,000 from interest gains alone! That’s not all…. you’re also saving around $150 in income taxes per year. That too will add up over time. Clearly, there is value to saving more by knowing your contribution limits.
Note: we used the compound interest calculator at investor.gov. See here if you want to use it. There are a number of such online calculators that you can use. In our calculations, we assumed a 6.5% annual interest rate.
What happens if I go over my limit?
Well, if you use ForUsAll, our product will prevent you from going over your contribution limit. If you don’t use ForUsAll, there’s still hope.
If you catch the excess contribution before the April 15 tax filing date, simply withdraw the excess amount from your retirement account. The excess amount is counted as income and becomes part of your regular tax filing.
If you catch your excess contribution after April 15, it’s going to be painful, but not fatal. Your excess contribution will be taxed twice: once when you contribute it to your retirement plan, and once again when you withdraw it from your retirement plan (because you have to). Please do your best to stay under contribution limits.
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