What Does “Max Out” Mean?

couple with umbrella

Maxing out your IRA or 401k simply means that you contribute the maximum amount allowed in a given year. 

What you really want to know is why maxing out makes a difference, right? Right.

Let’s say you contribute $2,500 to an IRA every year, for 30 years—because that’s all you can afford, so you say.

Your IRA balance could be worth about $252,000*, before income taxes. Pretty good.

But what if you max out your IRA by contributing $5,000 a year (the current maximum allowable yearly contribution)? P.S. If you’re 50 or older, the max is $6,000 for 2012.

Your IRA balance could be worth about $505,000 before taxes. Now that’s sweet.

Given that women live longer than men do, going to the max now could make a big difference in your 65-year-old quality of life.

*Assumes a 7% rate of return.