It’s a new year, so it’s time to consider boosting contributions to your employer-sponsored retirement savings plan—and the federal government is willing to help (a little.) The maximum contribution has increased this year, so you can shelter a bit more money from taxation, if you choose, to maximize your retirement savings.
For most workers, the 401k is their standard employer-sponsored retirement plan. Some workers, however, are enrolled in 403b or 457b plans, instead. While there are some minor differences between these plans, they are generally treated in a similar manner, and they usually have the same maximum contribution limits. The main difference between these plans is worker classification. Generally, 401k plans are used by for-profit businesses; 403b plans are used by tax-exempt groups, such as schools or hospitals; and 457b plans are for government workers, although there are some non-governmental organizations that also qualify to use these plans.
For simplification purposes, this discussion will refer to the most common plan, the 401k. The information is still relevant, though, if you are enrolled in either a 403b or 457b plan.
What are the new maximum contributions?
According to the IRS, If you are under age 50, your maximum 401k contribution is $18,500 in 2018, which is an increase of $500 over 2017 limits. For workers 50 and over, the catch-up contribution of $6,000 remains constant, which means you can contribute a total of $24,500 in 2018.
These amounts do not include any contributions from your employer. If you include all possible contributions from your employer, the total maximum amount you can shelter in your employer-sponsored tax-deferred plan in 2018 is $55,000 for those under 50 and $61,000 for those 50 and over.
If you are enrolled in a 403b and 457b plan, there are some minor differences in the “catchup provisions” in these plans. You should check with your plan administrator to learn about the specific provisions of your plan.
As you can see, investing in your 401k, 403b or 457b is a valuable, easy way to reduce your taxable income, while building your future retirement funds.
But do those numbers sound daunting?
It’s nice that workers can put away relatively hefty sums of tax-deferred money each year, which is earmarked for their future selves. But not everyone is worried about maximum contribution levels. Some people are more worried about saving anything at all, or scraping together enough to capture their entire employer match. If that sounds more like you, it’s still a good time to take a fresh look at your contributions to an employer-sponsored retirement plan.
Some of the best advice you can embrace for your future financial self is to save as much as you can and start as soon as you can. Your employer-sponsored retirement plan is a natural starting point. It is particularly important to try to qualify for all matching contributions, which essentially creates an instant return on your investment.
If you have trouble saving, look for ways to decrease your monthly expenses and make saving a priority. If you’re not feeling the pinch at least a little each month, you could probably save more—and you probably should. Your retirement account will play a major role in the financial security of your future self. Saving now can help make that account turn into a worthy safety net and give you some financial peace of mind.
Second 2018 bonus for savers: Recent tax changes
If you have diligently saved money in a tax-deferred account, pat yourself on the back. The 2018 tax reform bill is giving you a little bonus—in addition to higher maximum contribution limits. Tax reform put many workers into a little bit of a lower tax bracket, which means the money you’ve already socked away escaped being taxed at the previously higher rates. For those that begin retirement distributions this year, they will likely be taxed at the new lower rate.
This blog is for informational purposes only; we are not in the business of providing tax or legal advice and we generally recommend seeking the advice and counsel of a tax professional before taking any action that may cause a material taxable event.
Amin Dabit, CFP®
Latest posts by Amin Dabit, CFP® (see all)
- Your Guide to Annuities: Is an Annuity Right for You? - May 16, 2018
- Do You Know Your ETFs From Your Index Funds? - May 2, 2018
- Personal Capital’s Investment Risk Tolerance Quiz - May 2, 2018