Give Your Retirement Plan a Boost

Good news from the IRS? This probably sounds like an oxymoron to many people. However, IRS notice 2017-64, released recently, actually contains some positive tidings for many taxpayers; it raises the annual contribution limits on most retirement plans, starting January 1, 2018. This is certainly good news for anyone with a 401(k), 457, or 403(b) retirement plan. For these plans, the new annual contribution limit is $18,500, up from $18,000 in 2017, with the catchup provision for those 50 and older still at $6,000 per year. The IRS also raised the annual benefit limit for traditional pension (defined benefit) plans, from $215,000 in 2017 to $220,000 in 2018. Additionally, they raised the annual allowable compensation limit for deduction, benefit, and contribution purposes from $270,000 in 2017 to $275,000 in 2018. This means that for higher-earning employees, more income can be taken into account for determining employer and employee contributions (less excluded income translates into more money available for contribution to the retirement plan).

A married couple filing jointly can reduce their taxable income by $37,000, if they make the maximum contribution to their 401(k) plans. Assuming a 25 percent tax bracket, that amounts to a tax savings of $9,250–pretty significant for most of us! Not only that, but they’ll obtain tax-deferred growth on their savings until they start making withdrawals in retirement.

Annual limits for traditional IRAs remain at $5,500 for 2018, along with the $1,000/year catchup provision for persons age 50 or older. However, the IRS adjusted upward the amount of money you can earn and still make deductible contributions to your IRA, even if you are eligible to participate in a workplace retirement plan. Single filers who make up to $63,000 can contribute (compared to $62,000 in 2017), and married filers can earn up to $101,000 (vs. $99,000 in 2017).

The IRS also made a slight increase in the amount you can contribute to a Health Savings Account (HSA): $3,450 in 2018, compared with $3,400 in 2017.

A $500 annual increase may sound like a minor improvement, but it can have a major impact on your retirement. If you’ve got as much as 20 years to retirement and you earn only a 5 percent average return, that extra annual contribution could add another $17,000 or more to your retirement fund. And if you can earn an average market return of about 8.5 percent, it would mean an extra $26,000. It all adds up!

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