9

I know there are annual limits to how much can be contributed (both from the employee and from the employer).

But what about over the lifetime of the investment? If I max-out every year (say $16500), and I get a 12% return every year (it makes the math easier), from the time I am 25 till I retire at 65, does that mean I will have a little over $14 million at retirement?

If not, what is the limit that can be vested in the vehicle before I have to use something else?

  • similar, related question about IRAs – warren Aug 11 '11 at 18:56
  • found an interesting matrix on wikipedia giving an overview of the differences between 401(k) and IRA options – warren Aug 11 '11 at 19:22
  • 2
    Your number is actually low Since you forgot to consider potential Employer Matching or Contributions, and also the Catch-UP provisions that allow you to up your contributions when you get close to retirement age, and that the contrib limit is COLA adjusted and likely to increase with time. Oh and why start as late as 25, look at what happens if you start at 21! OTOH, I think your annual return number is very high, unless you are just picking a high value for the sake of an extreme example I would say 7% is more realistic. – Chuck van der Linden Aug 11 '11 at 22:34
5

I've never seen anything in any IRS publication that placed limits on the balance of a 401K, only on what you can contribute (and defer from taxes) each year.

The way the IRS 'gets theirs' as it were is on the taxes you have to pay (for a traditional IRA anyway) which would not be insubstantial when you start to figure out the required minimum distribution if the balance was 14Mill..

You're required to take out enough to in theory run the thing out of money by your life expectancy.. The IRS has tables for this stuff to give you the exact numbers, but for the sake of a simple example, their number for someone age 70 (single or with a spouse who is not more than 10 years younger) is 27.4.. If we round that to 28 to make the math nice, then you would be forced to withdraw and pay taxes on around $500,000 per year. (So there would be a hefty amount of taxes to be paid out for sure).

So a lot of that $500K a year going to pay taxes on your distributions, but then, considering you only contributed 660,000 pre-tax dollars in the first place, what a wonderful problem to have to deal with. Oh don't throw me in THAT briar patch mr fox!

2

The numbers aside (I'd not assume 12%/yr) there is no limit to the balance. There are 401(k) accounts that have great matching and profit sharing deposits putting the per year limit closer to $45k, combine that with company stock in, say, Apple which has risen 60 fold this past decade, and balances in the tens of millions are possible.

  • so - how do I get in on the "great matching and profit sharing"? =D – warren Aug 12 '11 at 15:25
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    Work for a company with those perks. Better still, start one, and hire me. :) – JTP - Apologise to Monica Aug 12 '11 at 21:29

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