If you are somehow managing to diligently contribute the maximum amount to your 401k and IRA accounts, then there’s good news for you in 2013. The IRS contribution limits for the major U.S. retirement accounts will be increased next year!
This is exciting news for anyone looking to invest more of their money without the burden of paying taxes on their returns. The Money Design November Update plan I proposed recently will get a big boost from these new increases that will help me to achieve my goals much more quickly and safely.
2013 IRS Contribution Limits:
Here are the official new maximum amounts you’ll be able to save in your tax-sheltered retirement accounts:
• IRA contributions: $5,500 per year (up $500 from last year)
• Employer sponsored plan contributions (401k, 403b, etc): $17,500 per year (up $500 from last year)
Remember That It’s All On You:
Don’t forget that if you haven’t started saving for retirement yet, you’re going to want to (and soon)!
Most of the classic pension plans that the older generation in the U.S. once enjoyed are now gone. The trend has gone from shifting the burden from the employer to the individual. Employer retirement plans like the 401k started becoming popular in the 1980’s and eventually became the dominate offering for most private and public firms. The IRA was created to be a supplementary and very similar type of investment plan, only this one would have no ties to the employer. Every few years the IRS contribution limits for these plans has increased.
Unlike other parts of the world such as the UK where there are very extensive types of public pension plans available, U.S. individuals are on their own for the most part when it comes to planning for retirement (with the questionable exception of Social Security). However, even our friends in the UK will need to consider funding their own pension annuities and ISA accounts if they plan to live comfortably during the golden years.
How Long Is It Going to Take Me to Reach One Million Dollars?
One fun little calculation I like to do with the IRS contribution limits for my accounts like my IRA and 401k is to see how long it theoretically take to reach one million dollars! (There’s nothing really special about the one million dollar mark – it’s just a physiological threshold where a lot of people consider to be rich!)
Suppose you first started saving in 2013, stuck to your guns and contributed the full amount each year, and did an EXCELLENT job of not getting greedy and picked some low cost Index Funds with an average annualized return of 8%, then you’d be looking at the following results:
Suppose this all works, then we’d have the following results:
• Using IRA contributions: 35.7 years
• Using 401k contributions: 22.3 years
• Using a combination of IRA and 401k contributions: 19.5 years
That’s right – double-dip and you’re looking at the possibility of becoming a millionaire within 20 years.
If you have more questions about 401k’s or investing in retirement accounts in general, try Smartest 401(k) Book You’ll Ever Read by Daniel Solin a try. You can also consult the My Money Design resources:
- Help! I Just Got My 401k Packet At Work! What Do I Do?
- Traditional vs. Roth IRA – Part 1: The Basics
Readers – Who’s excited about the new IRS contribution limits? Will anyone raise their retirement saving contribution levels next year?
2) Six Easy Steps to Figuring Out Your Retirement
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