401(k) contribution limits can change every year. We’ve got the latest limits released by the IRS for 2018, as well as prior years.
401(k) plans are the primary retirement savings vehicle for the middle class. This is particularly true as more employers automatically enroll new employees 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 2016 and 2017, 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 good news: for 2018, these contribution limits will go up to $18,500.
Of course, savers and investors aged 50 or older can take advantage of an additional catch-up contribution. This effectively increases the limit for those approaching traditional retirement age. In 2018, these taxpayers can contribute an additional $6,000 above the regular maximum of $18,500. As a result, if you are 50 or older, you can contribute a maximum of $24,500 into these tax-advantaged accounts in 2018.
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Total Contribution Limits and Examples
The total contribution limit, including employer contributions, has also changed. It is now at $55,000, up from last year’s $54,000.
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 goes up to $275,000 in 2018. That’s a sufficiently high maximum. It should cover more than just the middle class.
To illustrate,say a company matches an employee’s contributions at a rate of 50% up to a limit of 5% of the salary. An employee with a $100,000 salary contributes $15,000 to her 401(k). She will receive, at most, a $5,000 matching contribution (5% of the full $100,000 salary).
An employee at the same company earns $400,000 in compensation. She defers $15,000, so the matching contribution will be $13,750 (5% of the $275,000 maximum compensation, not $20,000).
The IRS has additional rules that require a company to balance benefits between employees earning $120,000 or more and all other employees.
Finding Account Fees
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. You could (and should) look at the various prospectuses in search of management expenses fees or expense ratios, expressed as a percentage of assets. But 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.
Now finding those fees is easier. The regulations that started in 2013 are still in place today.
Maximizing Your Contributions
To maximize your 401(k) contribution in 2018, spread the $18,500 across the number of paychecks you plan to receive throughout the year. That’s a contribution of about $1,541 each month for those age 49 or younger. The calculation for those over 50 who want to max the contribution is about $2,041 per month.
If your employer records your contributions as a percentage of your paycheck, remember to change them to account for 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.
| Year | 401(k) Maximum |
Catch-Up Contribution |
Maximum Allocation |
|---|---|---|---|
| 2018 | $18,500 | $6,000 | $55,000 |
| 2017 | $18,000 | $6,000 | $54,000 |
| 2016 | $18,000 | $6,000 | $53,000 |
| 2015 | $18,000 | $6,000 | $53,000 |
| 2014 | $17,500 | $5,500 | $52,000 |
| 2013 | $17,500 | $5,500 | $51,000 |
| 2012 | $17,000 | $5,500 | $50,000 |
| 2011 | $16,500 | $5,500 | $49,000 |
| 2010 | $16,500 | $5,500 | $49,000 |
| 2009 | $16,500 | $5,500 | $49,000 |
| 2008 | $15,500 | $5,000 | $46,000 |
Take Control of Your 401k
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You can also see the fees you are paying through Personal Capital’s Retirement Fee Analyzer. I was stunned to learn that the fees in just my 401(k) could cost me over $200,000, requiring me to put off retirement for three years! They also offer a free Retirement Planner. This robust tool will help you plan for retirement and show you if you are on track to retire on your terms.
Published or updated December 11, 2017.
{ 4 comments… read them below or add one }
“A taxpayer who earns more than $265,000 in compensation over the course of 2015 is not eligible to invest in a 401(k) account.”
Actually this is not what the compensation limit does. Everyone is eligible to contribute to a 401-k regardless of how high their compensation is. There are special rules that the 401-k must follow to make sure the benefits are distributed equitably or else the highly compensated employees will be excluded from the plan. However highly compensated starts at 120K for 2015, not 265K and that is a different animal not related to the annual compensation limits.
The annual compensation limit only affects how much compensation the employer is allowed to match. The employer is not allowed to match your salary beyond that compensation limit. So for example an employer could not set up up a plan where they matched 200% of your contributions up to the first 1% of your salary and then say an employee makes 1.5 million and contributes 1%. They would then put in 15K of their own money and the employer would match that with 30K of matching funds. This would not be allowed. The employer would only be able to match the first 265K of wages for a match of $5,300. This would keep the employer from setting up a plan that would allow the company to give excessive matches to top executives with a structure like this that would offer very little benefit to lower wage workers. The person making 1.5 million can still contribute their full 18K from their own funds. They just aren’t going to get matched on the full 1.5 million dollars.
The IRS explains it here:
http://www.irs.gov/Retirement-Plans/401k-Plans-Deferrals-and-matching-when-compensation-exceeds-the-annual-limit
Thanks for the clarification Apex. I’ll try to similarly clarify the article.
Does the maximum contribution also include employer contribution. So if the maximum is $18,500 is this a combination of both my contribution and my employer.
I’m 67 years old. How much can I contribute to my 401K. I wish to max it out. I’m already contributing 26% of my salary.