2018 Retirement Plan Contribution Limits

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The IRS recently announced updated retirement plan contribution limits for 2018, and there are several significant changes taking place. Here's how the new contribution limits will affect 401(k) plans, IRA investors, and Americans who use other varieties of tax-advantaged retirement savings plans.

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401(k), 403(b), 457, and Thrift Savings Plan contribution limits

For 2018, the contribution limit for employees into these types of accounts is rising from $18,000 to $18,500.

For participants who will be age 50 and older by the end of 2018, the catch-up contribution amount of $6,000 hasn't changed, meaning that older savers can choose to defer up to $24,500 of their compensation into their accounts.

Keep in mind that these limits only refer to elective deferrals. They don't include other contribution sources like employer matching contributions, nonelective deferrals, or allocations of forfeitures. Including all sources, the 2018 contribution limit for these plans is increasing by $1,000 to $55,000. This does not include the catch-up contribution, if applicable, for a possible overall maximum 2018 contribution of $61,000.

Self-employed individuals who use an individual 401(k) are considered both the employer and employee, and can contribute as much as 25% of their net self-employment income, up to the overall limit that applies to them.

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In addition to the standard catch-up contribution limit, 403(b) plans can permit employees with at least 15 years of service to contribute as much as $3,000 more as part of their elective deferrals, even if they haven't reached age 50 yet. For employees over 50, both catch-up provisions can be used in many cases.

Similarly, 457 plans have their own catch-up provision that allows participants within three years of the plan's normal retirement age to contribute as much as twice the annual elective deferral limit.

Traditional and Roth IRA contribution limits

This section is pretty easy, because nothing has changed in regards to the IRA contribution limits. IRA owners can still contribute up to $5,500 for the 2018 tax year, with an additional $1,000 catch-up contribution allowed for individuals age 50 or older. Contributions for 2018 can be made from Jan. 1, 2018 through the April 2019 Tax Day.

While the contribution limits haven't changed, it's important to mention that the income limitations have changed for both the traditional IRA deduction (if covered by an employer's retirement plan) and for Roth IRA eligibility.

SEP-IRA limits for 2018

Contributions to a SEP-IRA only come from the employer, and the maximum allowable contribution for 2018 is 25% of each employee's salary up to the same $55,000 maximum that applies to 401(k) and other workplace retirement plans as discussed in the first section.

For self-employed workers, who are also permitted to use a SEP-IRA to save for retirement, the effective contribution limit is reduced to 20% of adjusted profit after subtracting the self-employment tax, as the calculation is based on net self-employment income, which removes the SEP-IRA contribution itself.

2018 SIMPLE IRA contribution limit

For 2018, the SIMPLE IRA employee contribution limit is unchanged at $12,500, with a $3,000 catch-up allowance for participants age 50 or older.

From the employer's side, there are two choices. The employer can choose to match their employees' contributions dollar-for-dollar up to 3% of their salaries with no limit, or can contribute 2% of every employee's salary regardless of whether the employees contribute or not, up to $5,500. The first option is potentially more lucrative for higher-earning employees, as it implies an overall maximum annual SIMPLE IRA contribution limit of $25,000 for employees under 50 or $31,000 for employees 50 or older.

What it means to you

To be clear, in many cases these limits won't affect how much participants put in to their retirement accounts in 2018. IRA participants tend to max out their contributions, but this is certainly not the case for participants in accounts with far more generous contribution limits such as 401(k) plans.

However, the point is that the retirement savings contribution limits are quite generous in 2018. And you may be surprised at the difference a seemingly small increase in your retirement savings in 2018 could make over the long run.

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