The 401(k) retirement plan is one of the most common types of retirement saving plans that employers in the U.S. use. The IRS have the right of annually adjusting contribution limits. Your 401K maximum contribution limit for 2017 will remain at $18,000. However, the overall limit for 401(k) contributions has changed slightly. Here are the details of the 401K Maximum Contribution Limit.
On October 27, 2016, IRS announced various adjustments about cost of living. This would affect the dollar limits for different pension plans and similar retirement based items for 2017. For 2016, the 401K maximum contribution limit value for employees has remained unchanged at $18,000.
401K Maximum Contribution Limit Schedule for 2017
For the tax year 2017, 401(k) employees have the option of having a maximum of $18,000 of their contributions placed in their account. You can contribute an additional amount of $6,000 in the form of catch-up contributions if you are 50 and above. This 401K Maximum Contribution Limit have remained unchanged for the last two years.
However, there has been an increase in the overall 401(k) contribution limit for 2017. This includes an employee’s elective deferrals, non-elective employee contributions, employer matching contributions, and lastly any allocations of forfeitures. The overall contribution limit for a 401(k) account is $54,000.
For employees with age 50 or above, the catch-up allowance worth $6,000 applies to this limit too. This translates to a total limit of $60,000. You cannot contribute an amount which is greater than your total compensation.
401K Maximum Contribution Limit for Single Person Accounts
In case you own a business, you have the option of participating in your own 401(k) account, i.e. an individual or solo 401k. In this unique situation, you are both an employee as well as an employer for 401k contribution purposes.
From the employee perspective, the elective deferral limit is same, which is $18,000, and you have the option of deferring a maximum of $24,000 in case your age is 50 years or above. Moreover, your employer can make a contribution of up to 25% of the total compensation, which can be worked out with the help of some simple IRS guidelines.
Your overall contribution limit will remain $54,000 (or $60,000 if you are 50 or above). This limit will still apply to your individual 401(k). This is irrespective of the amount of self-employment income you generate.
All of these different retirement accounts have their own specific rules and contribution limits, so carefully consider and study these rules for making an informed decision. Also, self-employed people can obviously take advantage of investing in both Roth and traditional IRAs.
Maximizing Your 401k
One of the most obvious ways of maximizing your 401k is to contribute as much as you possibly can. But, it is often not practical for most of us to contribute up to the legally allowed limit. However, keep in mind that a small increase in contribution amount may make a considerable impact over a longer period.
If you intend to make a higher contribution to your 401k account, but do not think you can manage to contribute as much as you want straight away, then an alternate method may be to increase your contributions slowly and gradually.
A popular and feasible strategy entails increasing your rate of contribution by 1% of your compensation on a yearly basis. This applies until you approach your target saving rate. For instance, if you want to defer an amount equivalent to 10% of your compensation in your 401k account and currently contribute only 5%, try to increase your rate of contribution to 6% in 2017, and 7% in 2018. You can do this until you get to your desired saving rate of 10%.
You can also choose another option which involves increasing your rate of contribution whenever you receive a salary bump. For instance, if you receive a 3% bump in the current year and increase your rate of saving by 1%, your paycheck will increase, and simultaneously the amount of your retirement saving will grow quicker.
Lastly, another financially smart move concerning your 401k account that does not take a lot of effort involves examining the expenses, such as fees, you are shelling out on the 401k investments and consider if any cheaper alternatives can achieve the same financial objectives. Your investment fee features in the form of an expense ratio in the 401k literature, and in general terms, lower expense ratios are better within similar kind of investment class.
For example, assume your investment plan provides two different and distinct large-cap stock funds, from which you can choose. The first has an expense ratio of 1%. The second fund has a lower expense ratio of just 0.5%, it is usually better to consider the latter option. Reallocating some of your funds may be a good idea if it helps you achieve your objectives.
Tax Implications of 401k Contributions
The tax-allowable nature of a 401(k) account makes it extremely beneficial. This allows a greater percentage of your funds to be ploughed back for your future benefit. At the same time, you can reduce your income tax burden.
For instance, if you contribute $10,000 to your 401(k) account in the year 2017. Therefore, this falls under the 25% tax category, you will end up saving $2,500 on your tax bill. This is in comparison with the amount you would have paid if you did not contribute at all.
Moreover, employees who earn low to medium income can also take benefit of credit on retirement saving contributions, which is called the saver’s credit. This credit can provide you free cash that you can save for retirement purposes.
The size of the credit depends on your income. The credit amount can be equal to 10%, 20%, or up to 50% of your initial $2,000 in retirement contribution per year. Also, married couples have the option of taking the credit amount for each other. The maximum amount is $4,000 in total contributions.