2019 401(k) contribution annual limit to $19,000
First good news for 2019, On November 1st, the IRS announced an increase of 401(k) annual contribution limit from $18,500 to $19,000 [1]. The catch-up contribution remains $6,000 for those age above 50 [1]. The contribution limit for all sources combined is increased from $55,000 to $56,000. This means your individual payroll deferral, employer matching and contribution, and any other contribution towards 401(k) is no more than $56,000 a year. If you are age 50 or above, $62,000 a year thanks to catch-up contribution limit.
Another increment is that the salary cap for 401(k) calculation is increased to $280,000 from $275,000. The highly compensated employee threshold is also increased from $120,000 to $125,000.
401(k) Contribution limit changes [2]
| 2019 | 2018 | 2017 | |
| Annual Compensation | 280,000 | 275,000 | 270,000 |
| Elective Deferrals | 19,000 | 18,500 | 18,000 |
| Catch-up Contributions | 6,000 | 6,000 | 6,000 |
| Defined Contribution Limits | 56,000 | 55,000 | 54,000 |
| HCE Threshold | 125,000 | 20,000 | 120,000 |
*HCE: Highly Compensated Employee
Maximize your 401(k) now
What does mean to you? Regardless the contribution limit, always maximize your contribution. You need to adjust the percentage of deferral contribution to be 1/26 of $19,000 or higher if the payroll period is every other week. If the contribution reaches to the maximum limit, $19,000 in 2019, within tax year, typically the employer stops contributing any amount until the new tax year begins. But this policy is varied by employer. You might want to check with your employer.
Absolutely there is no reason not to take the advantage of employer matching system. Suppose, your employer matches 100% of 6% of your salary, then your 401(k) deferral must be 6% or higher. If you are young and started career recently, contribute as much as you can and increase your contribution limit by 1% or 2% every year until you hit the maximum limit. This way you can maximize the benefit of employer-backed retirement plan.
Small Difference of Contribution Makes a Big Difference
How does the maximum contribution make difference? Let’s see the following example. The left column shows the annual contribution of $19,000 with a compounded annual growth rate of 8%. The right column shows $18,000 annual contribution with the same CAGR (compounded annual growth rate). See how much it is going to make difference?
The difference Between $18,000 and $19,000 401(k) contribution with 8% CAGR
| Year | $19,000 | $18,000 | difference |
| 1 | 20,520 | 19,440 | 1,080 |
| 5 | 120,383 | 114,047 | 6,336 |
| 10 | 297,264 | 281,619 | 15,645 |
| 15 | 557,161 | 527,837 | 29,324 |
| 20 | 939,036 | 889,613 | 49,423 |
| 25 | 1,500,134 | 1,421,179 | 78,954 |
| 30 | 2,324,571 | 2,202,226 | 122,346 |
As you can see, it makes total of $122,346. The straight increment over 30 year period is $30,000. However, this is based on the assumption that the contribution is locked to $19,000. The IRS typically increases the contribution limit once a while based on the rate of CPI (consumer price index) increase. Now, let’s see if the IRS increases its annual contribution limit by the average $250 per year with the same condition and you contributed to the maximum limit every year. Therefore the year 1 contribution is $19,000, year 2 is $19,250, year 3 $19,500, and so on.
The difference between $19,000 fixed and $250 annual increment 401(k) contribution with 8% CAGR
| Year | $19,000 fixed | with $250 increment | difference |
| 1 | 20,520 | 20,520 | 0 |
| 5 | 120,383 | 123,307 | 2,925 |
| 10 | 297,264 | 312,406 | 15,142 |
| 15 | 557,161 | 598,175 | 41,013 |
| 20 | 939,036 | 1,025,982 | 86,947 |
| 25 | 1,500,134 | 1,662,491 | 162,358 |
| 30 | 2,324,571 | 2,605,652 | 281,081 |
It makes astonishing $281,081 difference over 30 year period just because of increment of $250 a year. In other words, that’s $0.68 a day. See the difference? It’s enough to buy an inexpensive house. This is how smart people increase their asset.
References
1. IRS
News Releases
401(k) contribution limit increases to $19,000 for 2019; IRA limit increases to $6,000
2. IRS
Retirement Plans
COLA Increases for Dollar Limitations on Benefits and Contributions