It might surprise you to hear that the Internal Revenue Service has some good news for you. IRS notice 2017-64, released recently, raises the annual contribution limits on most retirement plans, starting January 1, 2018. This is definitely good news for anyone with a 401K, 457, or 403B 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 remaining 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.
A married couple filing jointly can reduce their taxable income by $37,000, if they make the maximum contribution to their 401K 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-free 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. It all adds up!
Stay Diversified, Stay Your Course!