IRS raises annual cap on 401k contributions to $18.5K
- The annual contribution employees can make to their retirement savings plans will increase by $500 to $18,500 in 2018, the IRS announced. The annual catch-up limit on contributions for employees age 50 and older remains at $6,000.
- Income limits for contributing to traditional or Roth individual retirement accounts (IRAs) also increase in 2018. Income determines eligibility for making contributions. Taxpayers can deduct IRA contributions depending on their income and tax-filing status. For example, if an employee and a spouse are enrolled in their respective employer's IRA plan, the deduction could be reduced or phased out.
- The IRS Code under Section 415 imposes dollar limits on benefits and contributions for qualified retirement plans. The Secretary of the Treasury under Section 415(d) must adjust these limits annually for cost of living increases.
The annual increase in the contribution cap for retirement savings plans can help employees save more. However, catch-up contributions to retirement savings plans remain the same for older workers 50 and older, at a time when many find they haven't saved enough to live on later in life. A high percentage of them aren't sure if they'll ever retire, according to a 2016 Addison Group study.
Employees likely won't be aware of the IRS's updated cap, so HR must ensure the update is explained clearly and in detail to workers, using different communication channels, such as email or text.
Generally, financial wellness has become a priority for a number of employers, particularly in educating employees on how their benefits affect their money. Retirement savings are obviously a key part of that, but it's especially important in a time where many employees are retiring only to struggle with healthcare costs and other financial issues down the line. Better savings early on can lead to a more secure retirement later on — though many older, experienced workers are opting to remain in the workforce as independent contractors instead.
Low and moderate wage-earners might benefit from the increase in income limits allowed under the Retirement Savings Contributions Credit, or Saver’s Credit. Income eligibility for married couples filing jointly rose from $62,000 to $63,000; for heads of households, $46,500 to $47,250; and for singles or married people filing separately, $31,000 to $31,500.