Happy Birthday to the 401(k)!

Happy Birthday to the 401(k)!

           It was forty years ago last month (November 6th, 1978) that the section of U.S. tax law establishing the 401(k) plan was signed into law.  Initially, it was a provision in the Internal Revenue Code – Section 401(k) – that allowed employees to avoid being taxed on deferred compensation, but today it is one of the most important vehicles individuals can use to save for retirement by contributing money directly from their paycheck on a tax-deferred basis.  According to the Department of Labor*, 401(k) plans cover more than 65 million workers, represent $4.4 trillion in savings and support upwards of $385 billion each year in retiree needs. 

           How much you decide to contribute to your 401(k) is up to you, but there is a maximum amount that is set by the IRS each year.  For 2019, the annual contribution limit for workers ages 21-49 has been increased to $19,000.  Those 50 and older may add a “catch-up” contribution of $6,000, for an annual total contribution of $25,000. This limit total does not include the contributions your company matches.

*Department of Labor, Private Pension Plan Bulletin Historical Tables and Graphs 1975–2015 (February 2018), page 25. (Data does not include nonprofit and public-sector defined contribution plans).