Year-End Tax Tip: Max Out 401(k) Plan Contributions

Tax Tips

Year-End Tax Tip: Max Out Your 401(k) Plan Contributions

You can still save more for retirement if you haven't reached the 2019 contribution limit yet.

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If you participate in a 401(k) plan at work, there's still time to max out this year's retirement savings if you haven't yet reached the annual contribution limit (or won't by the end of the year). For 2019, you can squirrel away up to $19,000 in your 401(k) account if you're 49 years old or younger at the end of the year. If you're 50 or older, you can put in an extra $6,000 in "catch-up" contributions. (These limits apply to 403(b) and 457 plans, too.) If you contributed to more than one plan during the year—if you switched jobs mid-year, for example—the limits apply to the total combined contributions to all plans. In any event, you better hurry if you want to kick in even more for 2019…401(k) contributions up to the appropriate limit must be made before the end of the year.

2019 401(k) Plan Contribution Limits

Your Age Contribution Limit for 2019
Under 50$19,000
50 or Older$25,000

Here's an additional tip: Some 401(k) plans allow you to deposit a year-end bonus directly into your account. That's a great way to boost your retirement savings without cutting deeper into your regular paycheck.

SEE ALSO: 10 Year-End Moves to Lower Your 2019 Tax Bill

There's also a more immediate benefit to stashing more cash into your 401(k) plan before the end of the year. If you're contributing on a pre-tax basis in 2019, you're also lowering your 2019 taxable income. That means a smaller tax bill when you file your income tax return in April 2020. Of course, if you're saving on a pre-tax basis, you'll pay taxes when you withdraw money from the account in retirement. If you want to avoid the tax in retirement and pay it now, you can contribute to a Roth 401(k) if your employer offers that option.

Increasing your 401(k) contribution rate now can also help you save for retirement in 2020. How? By increasing your per-paycheck contribution level now—and keeping it at the higher rate—you'll be closer to the maximum contribution limit next year. (For 2020, the basic limit goes up to $19,500, while the catch-up amount jumps to $6,500.)

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2020 401(k) Plan Contribution Limits

Your Age Contribution Limit for 2020
Under 50$19,500
50 or Older$26,000

What if you go over the annual limit and contribute too much to a 401(k) plan in 2019? Notify the plan administrators as soon as possible and ask that the excess contributions and any earnings on that amount be paid out to you. If the excess is paid back to you by April 15, 2020, it will count as gross income for 2019, but not for 2020 (any income earned on the excess is taxed in the year it is taken out). The payment won't be subject to the 10% tax on early retirement plan distributions, either. If the excess is not withdrawn by April 15, it's effectively taxed twice—once for the 2019 tax year and again when distributed (in 2020 or later).

SEE ALSO: The 30 Best Mutual Funds in 401(k) Retirement Plans

Finally, what if your employer doesn't offer a 401(k) plan? You can contribute on your own to a traditional or Roth IRA. But there are contribution limits for IRAs, too. For both 2019 and 2020, the limit on annual contributions to an IRA is $6,000, plus an additional $1,000 in catch-up contributions if you're 50 or older. You may also be able to deduct contributions to a traditional IRA if you meet certain conditions. (If, during the year, either you or your spouse was covered by a retirement plan at work, the deduction may be reduced or completely phased out, depending on your filing status and income.) Plus, you don't have to contribute before the end of the year to have the contribution count for the 2019 tax year—you have until April 15, 2020, to make IRA contributions for 2019.

SEE ALSO: 10 Most Tax-Friendly States for Retirees