U.S. Workers Can Save $500 More in Their 401k Plan Beginning Next Year

Oct 25, 2014 05:00 AM EDT

(Photo : REUTERS/Shannon Stapleton) People wait in line to enter the Nassau County Mega Job Fair at Nassau Veterans Memorial Coliseum in Uniondale, New York October 7, 2014. U.S. job openings rose to their highest level in more than 13 years in August even as hiring fell, the U.S. Department of Labor said.

American workers can now increase their 401(k) contributions by US$500 following a recent change of rule in the Internal Revenue Service (IRS) that was announced on Thursday.

Limits for 401(k), 403(b), 457 compensation-retirement plans, and the federal Thrift Savings Plan shall increase from US$17,500 to US$18,000 beginning next year. Workers who are at least 50 years old will have a raise of US$6,000 from US$5,500 since 2009.

Like Us on Facebook

The combined increase in max limit gives older workers a total of US$24,000 retirement fund, incurring a US$1,000 difference from this year and last year. The change in 401(k) contribution limits is driven by changes in inflation index, something that is not consistent every year.

Data from Fidelity revealed decreasing numbers of workers maxing out their 401(k) plan with 15 percent of Baby Boomers, 8.9 percent from GenX, and 1.8 percent from GenY.

From 12 percent of workers who maxed out their contributions, 36 percent earn more than US$100,000 per year, while 6 percent are making US$75,000 to US$100,000 annually. Only 2 percent of those earning US$50,000 to US$75,000 have maxed out their plans and zero for those who are making less, said Vanguard.

The IRA contribution will remain at US$1,000 despite inflation rates since Congress decides when and how it should be changed, Ed Slott & Co. expert Jeff Levine said.

Meanwhile, a new Treasury Department regulation suggests voluntary deferred annuities from automatically-enrolled 401(k) contributors. Under the new guidelines, Qualified Default Investment Alternatives (QDIA) sponsors can opt to include deferred income annuities into target-date investment funds.

The plan is envisioned by the Obama's administration to provide secured retirement income and savings plans among workers. This also includes Qualified Longevity Annuity Contracts that is used to provide permanence of qualified retirement options.

The Department of Labor is expected to release final guidelines for sponsors in disclosing how much a worker can earn from their 401(k) plan.

TagsU.S. Treasury Department, Internal Revenue Service, United States labor force, 401k plans