1. 401K Max: Everything You Need to Know
2. 2017 401(k) Contribution Limits
3. Tips to Maximize Your 401(k)
4. One Person 401(k)s
5. Tax Benefits of 401(k) and Other Retirement Accounts
6. 2017 IRA Contribution Limits and Benefits
7. 403(b) and 457(b)
8. Why Are There NO Increases in the 2017 Contribution Limits?
9. After Tax Contributions, Matching Contributions, and Discretionary Contributions
10. What Happens If My Contributions Are Over the Limit?

401K Max: Everything You Need to Know

A 401k max is the maximum amount that can be contributed to a qualified profit-sharing savings plan, which is used for retirement purposes. More specifically, a 401(k) gives employees the option to contribute part of their wages to individual money vehicle accounts.

Employers can also contribute to the account. 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. However, the overall 401(k) contribution limit changed for the 2017 tax year by increasing to $54,000.

2017 401(k) Contribution Limits

Generally, participants choose the amount of compensation placed into their 401(k) account. For the 2017 tax year, the contribution limit remained at a total max of $18,000. For participants 50 and older, an additional $6,000 catch-up contribution is allowed. Therefore, when adding together the included elective deferrals, employer-matching contribution, non-elective employer contribution, and allocations of forfeiture, a total of $60,000 could be contributed to the 401(k) account for those 50 years of age and older. Additional rules for catch-up contributions remain complex, so be sure to check with your plan administrator or financial advisor for options.

Tips to Maximize Your 401(k)

  • You can make small increases over a long period of time. Particularly, when you receive a raise, you should consider increasing the amount you contribute.
  • If you earn an annual bonus, you can elect to have some of that money contributed directly to your 401(k) thereby reducing your bonus amount as well as the overall amount taxed.
  • You should periodically review your 401(k) account to see how well it is doing. If it’s doing well, perhaps you could contribute a one-time amount (so long as you are not maxed out on the contribution limit).
  • Depending on how much your employer contributes, you should consider that, the more you contribute, the more your employer may contribute. Therefore, this is yet another incentive to contribute more to your 401(k).

One Person 401(k)s

Solo 401(k)s do in fact exist. If you are self-employed, you have a choice of your own 401(k) plan. In this case, you classify as both an employer and employee for contribution purposes. From the perspective of an employee, the same elective deferral limit of $18,000 remains. If you are at least 50 years of age, you can defer up to $24,000. From an ‘employer’ perspective, you can contribute up to 25% of your compensation regardless of 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.

Tax Benefits of 401(k) and Other Retirement Accounts

  • The above-mentioned financial vehicles allow people to lower their tax liability while putting more of their money to work for their future.
  • Contributing $10,000 to a 401(k) in 2017 means you will fall into the 25% tax bracket. What it will do is save you $2,500 in taxes.
  • Allows moderate to low-income employees a way to save for retirement.
  • If married, the credit taken by each spouse can be up to $4,000.

2017 IRA Contribution Limits and Benefits

An IRA, also referred to as Individual Retirement Account, is an account in which a person can direct pre-tax income to investment options where it grows tax-deferred. The monies become taxed when withdrawn. A Roth IRA is a specialized individual retirement income account funded with post tax income. Money withdrawn from a Roth IRA remains tax-free. Both the IRA and Roth IRA allow individuals to contribute $5,500 annually. If at least 50 years of age, an additional $1,000 contribution is allowed. Working in a similar manner to 401(k) plans, the contributions for these types of accounts have specific rules. A Roth IRA has some additional benefits, such as penalty-free withdrawals. Either type of IRA serves to allow investments to compound and grow on a tax-deferred basis.

403(b) and 457(b)

A 403(b) is defined as a retirement plan, usually an annuity or mutual fund, created for public school employees, ministers, and tax-exempt organizations. This type of retirement plan provides a catch-up clause on annual contributions. Specifically, eligible employees that have 15 years of service can contribute up to $3,000 in additional elective deferrals annually even if they have not reached the age of 50. Once reaching the qualifying age of 50, the other catch-up contribution can be used within its limit. Therefore, these catch-up provisions can be used simultaneously.

The 457(b) is defined as a nonqualified retirement plan with a tax advantageous deferred compensation structure. These plans are provided by governmental as well as some non-governmental employers. Some 457(b) plans have special clauses that give participants within 3 years of their normal retirement age the ability to contribute twice the annual limit, thus, a total of $36,000.

Why Are There NO Increases in the 2017 Contribution Limits?

The Consumer Price Index (CPI) has remained low. Congress favors increasing contributions in increments of $500. For several years, the CPI has not reached that Congressional threshold. In the past three years, Congress has not considered the 2% annual inflation rate increase when having determined contribution limits.

From that perspective, the CPI increased 6%. If paired with the $18,000 contribution limit and you use 2014 as an origin point, this translates to a $1,000 increase. Any increase in 401(k) contributions reduces taxable income and affects the flow of tax revenues. Of course, not saving 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. It remains a matter of balance and of who pays for it at what point in time.

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 40l(k) in the United States was approximately$18,433, which represents a single year of normal contribution. Americans of moderate and lower incomes have yet to maximize their contributions, but clearly, Americans have continued attempting to to fund retirement plans to the maximum extent.

After Tax Contributions, Matching Contributions, and Discretionary Contributions

Some retirement plans allow after-tax contributions, generally being a non-Roth plan. These contributions made must become included in your taxable income, and cannot be used as a deduction. Your employer will also make matching contributions or elective deferrals on your behalf. Some plans insist employers make contributions while other plans remains solely discretionary on the part of the employer.

The employer matches a certain amount per dollar, such as 50 cents for every dollar you put in the plan or even $1 for $1. 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. Discretionary contributions, in most cases, are non-taxable income.

What Happens If My Contributions Are Over the Limit?

First, the contribution itself becomes renamed as an excess deferral. A contingency exists in the plan that, until April 15 of the following year, you will be paid the total amount of 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 funds will not be included in the gross income for that year and will not be taxable.

If, however, 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 be double taxed - when contributed and again when withdrawn.

If you need help with a 401(k) contribution issue, you can post your legal need on UpCounsel’s marketplace. UpCounsel hires only the top 5 percent of lawyers into its site. Most have 14 years of legal service and have worked with small business to corporates. Their level of expertise ensures you the best and latest legal advice.