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What Are the Maximum 401(k) Contribution Limits for 2018?

Note: This article is about the 2018 401(k) contribution limits. If you're looking for 2017's limits, you can find them here.

401(k) plans are the most widely used type of employer-sponsored retirement savings plan, and their contribution limits and tax advantages are generous. For 2018, the elective contribution and overall 401(k) contribution limits are rising, providing an even greater opportunity for savers to build a nest egg. Let's go over the 2018 401(k) contribution limits and tax benefits, the limits for similar types of retirement accounts, and some tips to help you maximize the value of your 401(k).

The 2018 401(k) contribution limits

For 2018, the limit for elective 401(k) contributions is increasing by $500 from its 2017 level to $18,500. After holding the elective deferral limit constant last year, the IRS chose to increase the 2018 limit in order to keep up with the rising cost of living. However, the catch-up contribution limit for 2018, which allows savers aged 50 or older to contribute even more, remains constant at $6,000 for a total maximum of $24,500.

Image Source: Getty Images.

Keep in mind that these limits only apply to elective 401(k) deferrals. In other words, these are the limits for contributions that you choose to have withheld from your paycheck and contributed to your account. It does not include any matching contributions from your employer, any non-elective employee contributions, or any allocations of forfeitures.

With that in mind, the overall contribution limit from all sources is rising by $1,000 in 2018 to $55,000. For savers aged 50 and up who are eligible for a catch-up contribution, the $6,000 limit is in addition to this maximum, for a total maximum possible 2018 401(k) contribution of $61,000.

Contribution Limit

2018 Tax Year

2017 Tax Year

2016 Tax Year

Elective deferrals

$18,500

$18,000

$18,000

Total contributions

$55,000

$54,000

$53,000

Catch-up contributions (in addition to the above limits)

$6,000

$6,000

$6,000

Data Source: IRS.

401(k) tax advantages in 2018

Most 401(k) contributions are made on a pre-tax, or tax-deferred, basis. In other words, the money that's withheld from your paycheck and contributed to your account does not count toward your taxable income for the current year, and you'll pay no taxes on it until it is withdrawn from the account.

For example, if your salary is $70,000 and you contribute $10,000 to your 401(k), your taxable income will be reduced to $60,000, before considering any other deductions and tax credits.

In addition, many 401(k) plans allow contributions to be made on a Roth, or after-tax, basis. Roth 401(k) contributions do not lower your taxable income, but qualified withdrawals in retirement will be completely tax-free. In other words, traditional 401(k) contributions give you a tax break now. Roth 401(k) contributions give you a tax break later.

Furthermore, there's another potential tax break known as the Retirement Savings Contributions Credit, or "Saver's Credit." This tax credit is worth as much as $1,000 per person, per year, and is designed to encourage low- to moderate-income taxpayers to save for retirement.

Depending on your adjusted gross income, or AGI, the tax credit is worth 10%, 20%, or 50% of up to $2,000 in retirement account contributions, including elective deferrals to a 401(k). For the 2018 tax year, here are the income thresholds and credit "tiers."

Credit Amount*

AGI, Married Filing Jointly

AGI, Head of Household

AGI, All Other Filers

50% of contribution

Up to $38,000

Up to $28,500

Up to $19,000

20% of contribution

$38,001-$41,000

$28,501-$30,750

$19,001-$20,500

10% of contribution

$41,001-$63,000

$30,751-$47,250

$20,501-$31,500

No credit

More than $63,000

More than $47,250

More than $31,500

*Credit amount limited to a percentage of contributions up to $2,000. Source: IRS.

In a nutshell, 401(k) investing can be a valuable tool for reducing your taxable income, as well as for building a nest egg.

Other retirement plans that these limits apply to

It's important to point out that in addition to 401(k) plans, these same limits apply to other employer-sponsored retirement plans as well. This includes:

  • 403(b) plans, which are offered by public-sector employers and certain charitable organizations.
  • 457 plans, which are offered by certain state and local governments.
  • Thrift Savings Plan, which is offered to civil service workers.

Although the same contribution limits apply, 403(b) and 457 plans have additional "catch up" provisions. For example, a 403(b) allows employees with at least 15 years of service to add as much as $3,000 in elective deferrals each year, even if they're not 50 years old yet. If you have one of these plans, check with your benefit administrator to determine your personal maximum contribution.

If you want to save even more

If the 401(k) contribution limit isn't enough, you may be able to supplement your retirement savings with an IRA, which also comes in pre-tax (traditional) and Roth varieties. However, your ability to take a traditional IRA tax deduction depends on your AGI; if you earn more than a certain threshold, then you'll get a reduced deduction, and if you earn above a second, higher threshold, then you won't be eligible for a tax break at all.

Specifically, if you're eligible to participate in an employer's retirement plan (which you are if you have a 401(k)), here are the AGI limits for a traditional IRA deduction, by tax filing status, for 2018:

Tax Filing Status

2018 Traditional IRA Full Deduction AGI Limit

2018 Traditional IRA Deduction Eligibility Limit

Single or Head of Household

$63,000

$73,000

Married Filing Jointly

$101,000

$121,000

Married Filing Separately

$0

$10,000

Data Source: IRS.

If your AGI is less than the full deduction limit for your filing status, you are entitled to deduct the maximum traditional IRA contribution, which is $5,500 for the 2018 tax year ($6,500 if you're 50 or older). If your AGI is between this threshold and the corresponding "phase-out" limit, you are eligible for a partial deduction.

In the case of a Roth IRA, the ability to contribute directly to an account at all depends on your income. Similar to the traditional IRA limits, there is a phase-out range for Roth IRA contributions.

Tax Filing Status

2018 Roth IRA Full Contribution AGI Limit

2018 Roth IRA Eligibility Limit

Single or head of household

$120,000

$135,000

Married filing jointly

$189,000

$199,000

Married filing separately

$0

$10,000

Data Source: IRS.

Finally, keep in mind that while you can't contribute directly to a Roth IRA if your income exceeds that upper threshold, there is a backdoor method you can use to get around the restriction.

Do you really need to save $18,500 (or more) per year?

In reality, the vast majority of 401(k) participants don't contribute as much as they're legally allowed to. Only about 12% of 401(k) investors max out their contributions, according to Vanguard, and for many Americans, it's not practical (or necessary) to do so.

The smart thing to do is to figure out how much you should be saving in your 401(k) and plan your contributions accordingly. First, you'll need to figure out your retirement number -- that is, how much you'll need to end up with in savings in order to generate enough income to maintain your desired quality of life in retirement.

Next, determine how much of a nest egg your current savings rate will produce. Most 401(k) plans have some type of forecasting tool, either on their website or on your paper statements, that can give you an estimate of how much you can expect to accumulate, based on your investments and your current savings rate. If it looks like you're going to fall short, adjusting your 401(k) contributions accordingly can be a smart move.

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