Jan. 5, 2019
598 words long, 3 minute read
Here at Financial Toolbelt we wanted to post a quick reminder that you can now contribute $19,000 a year to your 401k. This is an increase of $500 from the previous year's maximum of $18,500. You should update your contributions accordingly to make sure you keep contributing the maximum if you're able. Here's how to convert your old contributions numbers to the new maximum.
If you were maxing out your 401k in 2018, you will now have to update your contributions. the new $500 increase is roughly a 2.07% increase from last year. If you want to do the exact math to calculate how much you need to contribute per paycheck it looks like this:
(Contributions per paycheck x 38) / 37
This math should work for both percentage and dollar based contributions. No matter how your employer has you calculate your contributions, the above formula will work for you. Here are two examples:
In the first example our person makes $70,000 and contributes 26.43% to make sure that they max their 401k. This is what their numbers look like for 2018:
$70,000 x 26.43% = $18,501
You'll notice they have an extra dollar due to a rounding error. If they want to figure out the percentage they will need to contribute for 2019, they can plus their number into the formula.
(26.43% x 38) / 37 = 27.15%
They had to increase their contribution just under 1%. If you were doing the math along with us, please note that we rounded up the actual number, 27.1443243243%. We round up to both simplify the percentage and to ensure that the maximum is met in the next year.
If your employer does dollar based contributions, it is really easy to figure out your contribution. The easiest way is to take the max contribution and divide it by the number of times you get paid. You could also use our formula above if you want to do it that way. With dollar based contributions you aren't as concerned with salary as the contribution will be the same no matter what.
In our example, our person is paid on a bi-weekly basis. This totals 26 times a year. Using the new limit of $19,000 you can do the following math:
$19,000 / 26 = $730.77 per paycheck
Our example would need to contribute $730.77 per paycheck to max their 401k. Here is a table of how much you would need to contribute by pay length:
|Payment Schedule||Amount to max|
My gut reaction to seeing the $500 limit increase was that it didn't matter much. $500 in the grand scheme of things seems pretty small. To see if it really matters, I ran some numbers on how much this will actually impact someone's future. Let's run the following scenario:
This is a very simplified, but common scenario for someone working. Here's what the graph looks like with someone contributing the old maximum ($18,500) every year:
Starting amount: $0 | Additional yearly: $18,500 | Growth Rate: 7.0%
Value after 30 years: $1,869,851.31
And here is the graph for the new maximum ($19,000):
Starting amount: $0 | Additional yearly: $19,000 | Growth Rate: 7.0%
Value after 30 years: $1,920,387.83
Overall, the extra $500 a year means over $50,000 in added value given the same growth and time. While $50,000 in our scenario (our example person became almost a multi millionaire over time) might not matter in the grand scheme of things, it also isn't a small sum. I would recommend still maximizing your 401k if possible. You never know when that extra $500 will put you over the edge to early retirement.