Investing in your 401k plan or other retirement account is one of the best ways to prepare for retirement. These accounts offer an incredibly valuable tax advantage for investors. But there are limitations to these plans. Each year the IRS evaluates and releases updated 401k Plan Contribution Limits. These limit is the maximum you can contribute based on your age.
While the IRS won’t increase contribution limits every year, they also won’t decrease the contribution limits either. At worst, contribution limits will remain stagnant.
The maximum employee deferral for 2017 is $18,000 per person. There is also a maximum Catch-up Contribution of $6,000, which is only available to participants age 50 and over. These rates have remained the same since the 2015 tax year.
There was, however, a $1,000 increase to the Total Contribution Limit for 2017, which comes to $54,000. The max deferred compensation includes employee contributions, matching contributions, bonuses, and other deferred compensation. (If you are over age 50, you can also add your catch-up contributions to this number, bringing the max total deferred contribution limit to $60,000 for 2015).
Let’s take a look at all of these numbers in more detail and discuss what they mean for investors.
Maximum 401k Contribution Limits – 2007 – 2017
How to read this chart: The following chart lists the maximum 401k plan contribution limits, along with the contribution limits from previous years. The number under the heading “Employee Contributions” applies to persons under age 50. “Catch-up Contributions” apply to people age 50 and over. The column labeled “Total Contribution Limit” is the maximum you can apply to your 401k plan in any given year, if you are under age 50. This includes all possible contributions, including employee contributions, employer contributions, profit sharing, or any other allowable contributions. The final column is the total contribution limit from all sources for those who are age 50 or older.
||Catch-Up Contributions (Age 50+)
||Total Contribution Limit
||Total Contribution Limit w/ Catch-Up
These Contribution Limits Apply to 401k, 403b, 457, 401a Plans, and Thrift Savings Plan
These contribution limits apply to more than just the 401(k) plan – they actually apply to several different retirement plans that are written into the tax code. These limits also apply to Individual 401k Plans. It is worth looking into your specific plan as there may be slight differences you should be aware of, particularly when it comes to employer contribution rules, profit sharing, or other plan specific topics. TheMilitaryWallet.com covers Thrift Savings Plan contribution limits to discuss some of these examples as they apply to the Thrift Savings Plan, which is similar to a 401(k) plan, but is only available to military members and certain government employees.
These contribution limits also apply to the Roth and Traditional versions of the 401(k) plan and similar employer sponsored retirement plans.
Maximize Your 401(k) Contributions if You Are Able
If you are able to maximize your 401(k) contributions, you should be well on your way to setting yourself up for a solid retirement fund. There are two easy ways to determine how much to contribute to maximize your 401(k) account this year.
Flat contributions: If your company allows contributions of a flat dollar amount per month or per check, then simply contribute that amount from your paycheck. If you are under age 50, then you would be able to contribute up to $1,500 per month (or $750 if you are paid twice each month). If you are age 50 or over, you can contribute up to $2,000 per month, or $1,000 per check if you are paid twice per month.
Percentage based contributions: If your company doesn’t allow you to make a flat rate contribution, then you will need to do a little math. To do this, divide the maximum you can contribute (either $18,000 or $24,000) by your total salary. The percentage you see is how much you should contribute every paycheck. For example, if you earn $100,000 per year and your can contribute up to $18,000 to your 401k, you need to contribute 18% of your salary ($18,000 / $100,000 = 18%).
If you cannot afford to contribute up to the maximum, then try to at least contribute up to your employer match if your employer makes matching contributions. The employer match is part of your compensation package, and is essentially free money. Not contributing up to this amount is like leaving free money on the table! You should be able to change your 401k contribution amount, your tax withholding, and other similar actions through your Human Resources Department.
IRA or 401k? – Which is Better for Retirement Planning?
IRA or 401(k)? Another consideration when contributing to your 401(k) plan is whether or not you should contribute to it at the expense of contributing to a Roth or Traditional IRA. I covered this topic in a previous article – where should you invest first – IRA or 401(k)?
In general it is best to contribute enough to maximize any employer contributions you may be eligible for, then try to max out a Roth IRA if you are eligible to contribute.
If you can afford to maximize both investments, then go for it! Here is more information regarding the IRA contribution limits. Whichever you choose, you are doing the right thing by saving and investing for your retirement.
Visit the IRS website for more details regarding 401k plans and other retirement plans.