401k Max: Everything You Need to Know
A 401k max plan defines as a qualified profit-sharing savings plan in the USA that most people use for retirement8 min read
A 401k max plan defines as a qualified profit-sharing savings plan in the USA that most people use for retirement. It gives employees the option to contribute part of their wages to individual money vehicle accounts housed within the 401(k).
Employers can contribute to the account making it a benefit offered at a company. The IRS watches over the fund and adjusts contribution limits and determines how distributions of a 401(k) are handled. For example, the 401k limits changed slightly for 2017.
An employee’s contribution limit otherwise known as an elective deferral limit remained the same at $18,000. The overall 401(k) contribution limit changed for the 2017 tax season by increasing to $54,000.
The 2017 401(k) Contribution Limits
Generally, for the 2017 tax season participants choose as always, the amount of compensation moved into the 401(k) account. The contribution limit stayed at $18,000. For participants 50 and older, an additional $6000 catch-up contribution gives a chance to maximize the 401(k) before retirement since in the latter years most financial advisors opt to move the money into safe venues before regular distribution.
What did change that included elective deferrals, employers contributions, non-elective employee contributions, and allocations of forfeiture, lists as the contribution limit of $54,000 when summed? If a participant has reached the grand decade of their 50s, the IRS has allowed the $6000 catch-up rule. For this group, the 401(k) sums to $60,000.
Rules for catch-up contributions remain complex so check with the plan administrator or your financial advisor for options. Other money vehicles exist for the highly compensated. IRS puts limits on contributions since those have a classification of pretax dollars to prevent those who can afford to defer large compensations use other devices for building wealth.
403(b) and 457(b)
A 403(b) defines as a retirement plan made for public school employees. Ministers and tax-exempt organizations. Investments in these plans use the money vehicles of annuities or mutual funds. The 403(b) have a catch-up clause on contributions. Eligible employees that work for 15 years can add up to $3,000 in additional elective deferrals annually even if they have not reached the age of 50. Once reaching 50 the other catch-up contribution can be used within its limit. The catch-up rulings were made to be used simultaneously.
The 457(b) defines as a nonqualified retirement plan with a tax advantaged deferred-compensation structure. Governmental and some non-governmental employers provide the plan for its employees. Some 457(b) plans have special clauses that give participants a three year span before their normal retirement age the ability to contribute twice the annual limit which tallies at $36,000.
One Person 401(k)s
Solo 401(k)s exist. If you are self-employed, the choice remains for you to have one of your own 401(k) plans. In this case, you classify as an employer and as an employee for contributions. From the perspective of an employee the same elective deferral ruling of $18,000 remains. If 50 and over you can defer up to $24,000. A good perk becomes looking from the employer perspective where you can contribute a maximum of 25% of your compensation no matter how much self-employment income you have earned. So, the overall limit now becomes $54,000 and again $60,000 counting the 50-year-old and above clause to your solo 401(k). Being self-employed allows some other options as well for retirement. Other special accounts types such as SIMPLE IRA or SEP-IRA exist. Finally, traditional IRA and Roth IRA remain options. Each account has their own rules so ask your financial advisor about the options possible.
2017 IRA Contribution Limits and Benefits
IRA stands for an individual retirement account that a person can direct pre-tax income to investment options where it grows tax-deferred. The monies become taxed when withdrawn. Roth IRA is a specialized individual retirement income account funds with post tax income. Money withdrawn from a Roth IRA remains tax-free. Both accounts let individuals contribute $5,500 for the year presently. An additional $1,000 contribution can become given if a person reaches the age of 50 or older. Working in a similar manner to 401(k) plans the contributions have specific rules when it applies to when the IRS becomes paid. Roth IRA has some additional benefits such as can be withdrawn without any penalty at any time. Roth did not require minimum distributions. If you earn income you can deposit in a Roth IRA.
Either type of IRA serves to allow investments to compound and grow with a tax-deferred basis. In most cases, you will not pay on capital gains and dividends annually. The intention when withdrawing and having to pay tax remains you may be in a lower tax bracket. Contribution limits list as lower than a 401(k). As part of a retirement portfolio, an IRA makes a good addition. The flexibility of investing in stocks, mutual funds, and bonds allows some leverage when markets become volatile. The 401(k) does limit those options to a small selection. The IRA allows some comparison shopping on the fees asked. Locking in the present tax rate remains a good feature.
Tax Benefits of 401(k) and Other Retirement Accounts
The above mentioned financial vehicles allow a person to lower their tax liability while putting more of their money working for their future. Depositing $10,000 to a 401(k) in 2017 means you will classify into the 25 percent tax bracket. What it will do is save you $2,500 in taxes. That $2,500 savings will work for you now instead of for the government. The financial tool essentially allowed moderate to low income employees a way to have money for retirement. Dependent upon the individual’s income level the credit has reached levels from 10 percent to 50 percent on the first $2000 in retirement contributions annually. If married, the credit taken by each spouse can be up to $4,000.
Tips to Maximize Your 401(k)
It begins with the individual. Maximize your contribution whenever possible. Small increases in the amount given has a huge impact over time. Increasing contributions gradually takes the sting out of it. Increasing a contribution 1 percent each year to your salary will get you to your goal oriented savings rate over time. Others increase their desired rate by increasing the contribution rate when they receive a raise.
If you increase by 3 percent in the present year go head and take 1 percent and add to the retirement savings plan contribution. The money has not been in the paycheck by front ending it you will have 2 percent more to spend still, and your retirement funds will accelerate in growth. Make it a habit to examine the fees you are paying on your 401(k) investments. Check if lower fees are possible in the same investment class. For example, plans that have different large-cap stock funds to choose from see what the fee is for each. Say one has a 1 percent rate while the other has a .05 percent. If the latter offers the same investment options, then allocate the money there. Early contributions no matter how small make money over time. It does not have to be a large amount to accomplish the goal.
Highlights of Changes for 2017
Now that the limits for contributions and income have been established you can begin looking at the details to help make decisions. In a surprise move for 2018, the IRS announced the contribution limits for the Health Savings Accounts (HSA). The Federal government left the Thrift Savings Plan at a level of $18,000. The income ranges that determine eligibility for deductible contributions to a traditional IRA, and contributions to Roth IRA so to claim the saver’s credit increased. Check conditions of deducting contributions when tax time rolls around for traditional IRA. If your spouse or you in 2017 was covered by a retirement plan at a job that deduction could be reduced or phased out depending on how you file and the income level. The IRS appears to be eliminating that credit. Be prepared. The phase out ranges list as follows:
$62,000 to $72,000
Married Couple Filing Jointly
One Spouse makes contribution to their work plan
$99,000 to $119,000
Married Couple Filing Jointly
One Spouse no work plan but partner has plan
If income lists $186.000 to $196,000
A married individual who decides to file a separate return and has a workplace retirement plan will not have a cost of living adjustment and will stay at $0 to $10,000.
Over all the IRS declared the phase out range for individuals contributing to a Roth IRA and single or head of the household as $118,000 to $133,000. Married couples filing jointly the phaseout range became $186,000 to $196,000. For married individual filing with a separate return that contributes to a Roth IRS does not get an annual cost of living adjustment and will stay at $0 to $10,000.
Low income and moderate workers the income limit on the saver’s credit sometimes called retirement savings contributions credit will become $62,000 for married couples filing jointly. For heads of household, it will become $46,500. For singles or married individuals filing separately, it will become $31,000.
Why Are There NO Increases in the Contribution Limits?
The Consumer Price Index (CPI) have stayed small. Congress favors increasing contributions in increments of $500. For several years the CPI on an annual basis has not reached that Congressional threshold. Presently, Congress does not consider the 2 percent inflation rate per year in the last three years when deciding about contribution limits. From that perspective, the CPI increased 6 percent. If paired with the $18,000 contribution limit you can use 2014 as an origin point, and it translates to a $1,000 increase. Congress did not view it that way reality presented it.
Any increase in 401(k) contributions reduces taxable income and affect to flow of tax revenues. Of course, not acquiring money for retirement and not having money to retire on uses up tax revenues when programs for senior citizens must be developed to sustain the elderly in their elder years. It remains a matter of balance and of who pays for it when. Most of this could be balanced more with an audit of wages and an adjustment to rectify wage stagnation. In 2015 the median value of 401(k) in the USA listed as $18,433 which represents a single year of normal contribution. Americans of moderate and lower incomes have yet to maximize their contributions but obviously Americans when presented the opportunity attempt to fund retirement plans.
After Tax Contributions, Matching Contributions, and Discretionary Contributions.
Some retirement plans allow after tax contributions. In general, it will be a non-Roth plan. Those contributions made must become included in your taxable income. Those contributions cannot be used as a deduction. Your employer though makes matching contributions or an elective deferral on your behalf.
Some plans insist employers make contributions and other plans it remains discretionary. The employer correlates a certain amount per dollar such as 50 cents for every dollar you put in the plan. That matching employer contribution is not taxable income. Some retirement plans use discretionary or non-elective employer contributions. These remain at the employer’s discretion. It must become available to all employees, not a few individuals. Discretionary deposits in most cases are non-taxable income.
What Happens If My Contributions Are Over the Limit?
First, the contribution becomes renamed as an excess deferral. A contingency exists in the plan that until April 15 of the following year that you will become paid the total amount of the excess deferrals. At some point, you must withdraw the excess deferral amount. If you do it on or before April 15 of the following year, the monies will not be included in the gross income for the year and will not be taxable. IF you withdraw the excess deferral amount after April 15 of the following year the rules change. The amount will be included in the taxable income for the year in which it becomes deferred (contributed). It will cause your income to become double taxed. It became taxed when contributed and taxed when withdrawn. You cannot leave the money in the plan since the IRS will disqualify the plan for tax benefits.
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