Federal income taxes are a fact of life, but there are plenty of things you can do to minimize the tax bite — and a good place to start is with your employer-sponsored 401k plan. Not only do the investments in this type of retirement account grow tax-deferred, but all of the money you put into the plan — up to established 401k contribution limits — are made with pretax dollars, so more of your money is working for you.
Contribution limits for your 401k plan are determined by such factors as the year the contribution is made, the type of 401k plan in effect, your age and income, and in some cases your filing status. The Internal Revenue Service lists two limits that apply to your annual 401k contributions:
- The 401k limit on elective tax-deferred contributions is $18,000.
- Overall contributions to your 401k plan account — including your contributions and any contributions your employer makes — are limited to $54,000.
401k Contribution Limits
The deferred contribution limit for both 2016 and 2017 is $18,000 for traditional and safe harbor 401k plans, and $12,500 for SIMPLE 401k plans. The IRS notes that the contribution limits might increase in future years to account for changes to the cost of living. The government grants an additional catch-up contribution for plan participants who are at least 50 years old by the end of the calendar year. Those with a traditional or safe harbor 401k can contribute up to an additional $6,000, and those with a SIMPLE 401k can contribute an additional $3,000 for the 2016 and 2017 tax years.
If you’re fortunate enough to participate in a 401k plan that includes employer contributions, your retirement savings can increase dramatically, but there are limits to the total amount that can be contributed to your plan. The most that can go into your 401k plan for the 2016 tax year is the lessor of 100 percent of your compensation, or $53,000. That amount increased to $54,000 for the 2017 tax year, which doesn’t include catch-up contributions for those who are eligible.
Find the maximum 401k contribution limits at a glance in the following tables:
|401k Maximum Contribution Limits|
|401k Plan Limits||2017||2016|
|401k Elective Deferrals||$18,000||$18,000|
|Annual Defined Contribution Limit||$54,000||$53,000|
|Annual Compensation Limit||$270,000||$265,000|
|Catch-Up Future Contribution Limit||$6,000||$6,000|
|SIMPLE 401k Plan Limits|
|SIMPLE Employee Deferrals||$12,500||$12,500|
|Annual Defined Contribution Limit||$12,500 + up to 3% of employee compensation, typically capped at $270,000||$12,500 + up to 3% of employee compensation, typically capped at $265,000|
|SIMPLE Catch-Up Deferral||$3,000||$3,000|
How to Get the Saver’s Tax Credit
If you need another incentive to help you learn how to save for retirement, consider the retirement savings contribution credit, commonly referred to as the saver’s credit. Depending on your income and filing status, you could be eligible for a tax credit of up to 50 percent, 20 percent, or 10 percent of the contributions you make to your retirement plan or IRA — up to $2,000, or $4,000 if married filing jointly. It’s almost like getting free money for something you’re already doing.
See the following table to find details on the saver’s credit at a glance.
|2017 Saver’s Credit|
|Credit Rate||Married Filing Jointly||Head of Household||All Other Filers|
|50% of your contribution||Adjusted gross income not more than $37,000||Adjusted gross income not more than $27,750||Adjusted gross income not more than $18,500|
|20% of your contribution||$37,001-$40,000||$27,751-$30,000||$18,501-$20,000|
|10% of your contribution||$40,001-$62,000||$30,001-$46,500||$20,001-$31,000|
|0% of your contribution||More than $62,000||More than $46,500||More than $31,00|