401(k) plans are the primary retirement savings vehicle for the middle class, particularly as more employers enroll new employees automatically in the plans. And for those who have the ability to maximize their contribution each year, the new calendar year offers an additional opportunity.
In 2015 and 2016, the maximum contribution limits were the same. For retirement accounts — which include 401(k) accounts, 403(b) accounts, most 457 plans, and Thrift Savings Plans — these stayed at $18,000. In case you were holding out for an increase, I have bad news: for 2017, these contribution limits have remain unchanged.
Of course, savers and investors aged 50 or older can take advantage of a catch-up contribution. This effectively increases the limit for those approaching traditional retirement age. In 2017, taxpayers who meet this age-based criterion can contribute an additional $6,000 above the regular maximum of $18,000. As a result, if you are 50 or older, you can contribute a maximum of $24,000 into these tax-advantaged accounts. (This is also the same as the past two years.)
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The total contribution limit, including employer contributions, has changed, however. It is now at $54,000, up from last year’s $53,000.
The benefits of a 401(k) plan are, by design, directed primarily at people who most need an incentive to save for retirement. This may help contain the tax benefits within the middle class. The government does this by applying a maximum level of compensation to which matching benefits apply.
In 2017, only the first $270,000 in an employee’s compensation over the course of 2017 may be applied to the company’s matching formula. That income limit has grown from $265,000 in 2016. That’s a sufficiently high maximum and should cover more than just the middle class.
To illustrate, if a company matches an employee’s contributions at a rate of 50% up to a limit of 5% the salary, an employee with a $100,000 salary deferring $15,000 will receive at most a $5,000 matching contribution (5% of the full $100,000 salary). If an employee at the same company ears $400,000 in compensation throughout the year, deferring $15,000, the matching contribution will be $13,500 (5% of the $270,000 maximum compensation, not $20,000). There are additional rules in place that require a company to balance benefits between highly compensated employees (those earning $120,000 or more) and all others.
Beginning in 2013, new regulations required 401(k) plan administers to explicitly state in quarterly statements how much investors are paying in fees. Previously, this information was not easy to discover. While you could (and should) look at the various prospectuses in search of management expenses fees or expense ratios, expressed as a percentage of assets, there were at least two obstacles:
- The expense ratios force you to do your own calculations to determine how much money you’re spending in fees.
- Not all fees are included in expense ratios. Some funds, like annuity-based mutual funds, don’t have expense ratios but certainly have fees.
To maximize your 401(k) contribution in 2017, spread the $18,000 across the number of paychecks you plan to receive throughout the year. That’s a contribution of $1,500 each month, $750 twice a month, $692 every two weeks, or $346 a week for those age 49 or younger. The calculation for those over 50 who want to max the contribution are $2,000 per month, $1,000 twice a month, $923 every two weeks, or $461 a week.
If your contributions are recorded in the form of percentages, don’t forget to change your contribution to take into account raises and bonuses. If you are expecting your company to match your contributions at some level, and you reach your 401(k) contribution limit before your last paycheck, you may miss out on free money.
The following table illustrates the change in 401(k) contribution limits over the past several years.