For several years, the 401k maximum contribution has remained the same. Are you worried about this? If not, you should at least be cognizant of how this can affect your finances. The more you learn about the 401k maximum contribution, including how it affects your situation, the better off you will be.
From 2010 through 2012, the maximum contribution was capped at $16,500. While this sounds like a large amount, once you take a closer look at the past you will realize that it has not increased much. For example, the maximum contribution in 2007 was $15,500 – only $1,000 less than what it is today.
Why the 401k Maximum Contribution Has Remained Flat
The main reason why the max contribution has remained flat is simple: the cost of living adjustment (COLA) has stayed the same. In October of every year, 401k limits are calculated based on the rate of inflation during the third quarter as compared to the same period the previous year.
Although the 401k maximum contribution has never declined, it could if the COLA decreases. As it is now, increases have been slow over the past few years based on the current economy.
Are You Taking Advantage of the Maximum Contribution?
The more money you invest in your 401k the better off you will be in retirement. As noted above, you can only contribute up to $16,500 per year currently. As this number increases, you can invest more money. Since the 401k maximum contribution is based of COLA, taking advantage of the maximum contribution each year is one to prepare against inflation in your retirement account.
However, more and more people are finding that they don’t have a lot of “disposable” income. If you find yourself in this situation, it could mean that you are taking most of your money, even funds that were previously used for investing, and putting it towards month-to-month expenses.
Fortunately, under current 401k rules, those age 50 and older can make “catch up” contributions. For 2011 and 2012, the maximum catch up contribution is $5,500.
However, it is best not to rely solely on this catch up contribution and instead invest as much and as early as possible so you get the power of compound interest working on your side.
Not contributing to your 401k is a big mistake. Unfortunately, poor economic growth has held down the 401k maximum contribution and made it harder for people to invest the maximum contribution. Despite this fact, $16,500 per year, or $22,000 per year if you are over 50, is still a good investment.