Market Beat: 401k contribution limits are increasing
October 24, 2017
The Internal Revenue Service recently announced that 401k retirement plan contribution limits will go up by $500 in 2018. They haven't been increased since 2015.
The new tax-free contribution limit will be $18,500 for 401k plans. Workers over the age of 50 can contribute $24,000 per year, and that will increase to $24,500.
Employees who are fortunate enough to be able to max out their retirement plan contributions will find that increase helpful. Five hundred dollars per year may not sound like much, but for younger people that extra $500 per year might increase your retirement account by more than $50,000 dollars depending upon your time frame and the rate of return you receive. The increased limits will also apply to 403b plans and most 457 deferred compensation plans.
Individual Retirement Account contributions limits will remain at $5,500 per year with an additional $1,000 catch-up contribution allowed for people over 50 years of age.
The new contribution limits are good news for retirement savers, but we'll need to keep our eye on what Congress does with tax law changes. Recently, the New York Times reported there was a rumor circulating that unnamed members of Congress were going to propose a serious reduction in retirement plan contribution limits, perhaps as low as $2,400 per year, according to "several lobbyists and consultants."
Let's hope that the proposal is not included in the new tax package, as it would be a major setback for workers planning for retirement. Lowering the contribution limits now could lead to increased tax revenue in the near term. More savers would probably choose to use the Roth option with an after-tax dollar if the contribution limits do get lowered significantly. President Donald Trump has tweeted since the article was published that there will be no changes to 401k plans.
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It's been just over 30 years since President Reagan signed the Tax Reform Act of 1986 into law. Since then, tax law has become much more complicated, nearly tripling in size over the last 30 years. The tax code, today, is over 2,500 pages long with 70,000 additional pages of forms, instructions, court decisions and more.
We should see the new tax proposal soon. Some of the changes that have been discussed should be beneficial to investors. Lowering the corporate tax rate will lead to dividend increases and stock buybacks, which will be good for stock market.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.