Financial Planning, Retirement

You Can Contribute $500 More To Your 401(k) In 2018

10/25/17 8:00 AM

iStock-629986206.jpgLast week we learned that Social Security recipients will receive a 2.0 percent cost-of-living adjustment (COLA) to their benefits in 2018. Annual COLAs are based on inflation data from the Bureau of Labor Statistics (BLS) and as evidenced by the upcoming year’s relatively large increase, upward price pressures for consumers have clearly picked up recently. Social Security benefits, though, are not the only thing the government regularly indexes to inflation.

For example, there are annual limits on the dollar amount of contributions that can be made to popular tax-advantaged retirement plans. With 401(k), 403(b), and most 457 accounts, for instance, current law allows individuals to contribute up to $18,000 per year (plus another catch-up contribution of $6,000 for those ages 50 and older). Similarly, Individual Retirement Arrangements (IRAs) have an annual contribution limit of $5,500 along with an additional $1,000 for savers ages 50 and older.

Internal Revenue Code section 415(d) requires that such dollar limitations be adjusted annually for cost-of-living increases and inflation was indeed strong enough this year to warrant a change in some of the above-mentioned caps. Specifically, the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan will be increased from $18,000 to $18,500 next year. The last time such an increase occurred was in 2015.

The limitation on annual contributions to an IRA, though, will be kept at $5,500 in 2018, and catch-up contribution caps across the board will also be left unchanged. Another noteworthy adjustment is that the income ranges for determining eligibility to make deductible contributions to traditional IRAs, to contribute to Roth IRAs, and to claim the Saver’s Credit, will all increase next year. More details on these and the various other alterations that will or will not occur in 2018 can be found in IRS Notice 2017-64.

For some the increase to the annual 401(k) contribution limit may not seem significant but NerdWallet estimated that a 30-year-old who starts investing the additional $500 each year could have an extra $70,212 by the time he or she retires. Sadly, just 9 percent of 401(k) participants make annual contributions that come within 10 percent of the limit, according to an earlier study from the Center for Retirement Research. On the bright side, more and more plan sponsors are utilizing automatic escalation and other techniques to boost workers’ savings rates.



Sources: U.S. IRS, CRR, CNBC, NerdWallet

Post author: Charles Couch