Has the government increased the contribution limit for 401(k) in 2018?

Q. Hi, I recently heard about an increase in the 401(k) contribution limit and would like to know about the possibilities regarding the same. I am about to max out my 401(k) contributions and also looking for ideas on how to save better this year. My current employer offers a 401(k) retirement savings plan. Christopher, North Carolina.

A. Yes, it is true. An increase in the 401(k) contribution limit has been announced by the government after its annual reassessment. This means that almost 80 percent of the workforce that counts on its 401(k) accounts as a key source of income after retirement can expect benefits.

In 2018, the 401(k) contribution limits will be increased by $500 to reach $18,500. 401(k) is an excellent option for retirement savings since the money continues to grow without being taxed, even though there is a restriction on the amount you can withdraw each year.

Today, a 401(k) plan is the most popular retirement savings scheme offered by an employer to the workers. And now, with an increase in the contribution limit, you can expect bigger savings opportunity and greater security for your post-retirement life.

The optional deferral limit was kept constant by the IRS in 2017. However, this year, it has chosen to increase the limit so that it is par with the continuously rising living costs. While there has been an increase in the contribution limit for 401(k), it is important to note that the catch-up limit for contribution remains the same in 2018 i.e. $6,000 on a total of $24,500. This is the limit that permits people who are 50 years or more to make higher contributions.

It will be vital for payroll and HR managers to make adjustments to their systems and to communicate about the new contribution limits to their employees in annual enrollment materials. The increase in the 401(k) contribution is the only one that has happened since the 2015 plan year and indicates a 1.97 rise in the consumer price index (2016-17 third quarter comparison).

You need to note that the limits are only applicable to optional 401(k) deferrals. This means that they are the contribution limits which one chooses to withhold from their paycheck in order to make contributions their account. In the given scenario, it might be a good idea for high earners to make slightly higher contributions as it will help them reach their maximum annual limit.

 

About Elliot Earl, Director, Pension Trade Association
Director, Pension Trade Association Founded in 1982, the Pension Trade Association [California Domestic Nonprofit Corporation #C1629080] is dedicated to helping workers save for their retirement through expanded coverage of 401k -type defined contribution pension plans.

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