Save More in 2018

Retirement contribution and Social Security limits on the rise

The maximum contribution to 401(k) accounts rises by $500 in 2018, the first increase in three years. If you have not already done so, now is the time to plan for contributions into your retirement accounts in 2018.

Retirement Contribution Limits
Retirement Program 2018 2017 Change Age 50 or
over catch up
401(k), 403(b), 457 plans
$18,500
$18,000
+$500 add: $6,000
IRA: Roth
$5,500
$5,500
none add: $1,000
IRA: SIMPLE
$12,500
$12,500
none add: $3,000
IRA: Traditional
$5,500
$5,500
none add: $1,000
Social Security
Item 2018 2017 Change
Wages subject to Social Security
$128,700
$127,200
+$1,500 Annual Social Security employee tax: $7,979.40
Average estimated monthly retirement benefit
$1,404
$1,360
+$44

Don’t forget to account for any matching programs offered by your employer as you determine your various funding levels for next year.

Fix Your Overfunded Accounts

Home office deductions

Is socking away large sums in a tax-deferred retirement account ever a bad idea? It is when you exceed the annual IRS limits. Whether intentional or not, the penalties can be painful. Here’s how overfunding occurs and what steps to take to fix the problem.

How overfunding happens

Overfunding retirement accounts happens more than you may realize. It can be the result of a job change that causes you to participate in two different employer retirement plans. Sometimes people forget they made IRA contributions early in the year and do it again later. Others forget that the IRA limit is the total of all accounts, not per account. The rules are complicated. Traditional IRAs can’t be contributed to after age 70½, while Roth IRA contributions are subject to income limits. Plus all contributions are predicated on having earned income.

IRAs

The annual Roth and Traditional IRA contribution limit is $5,500 ($6,500 if age 50 or older). If you surpass this amount, you pay a 6 percent penalty on the overpayment every year until it’s corrected, plus a potential 10 percent penalty on the investment income attributed to the overfunded amount.

The fix: If the overfunding is discovered before the filing deadline (plus extensions), you can withdraw the excess and any income earned on the contribution to avoid the 6 percent penalty. You will potentially owe a 10 percent penalty in addition to ordinary income tax on the earnings of the excess contributions if you’re under age 59½. Often you can apply the contribution to the next year. If your issue is due to age (70½ or older for a Traditional IRA) or income limit (for a Roth IRA), consider recharacterizing your contribution from one IRA type to another.

401(k)s

The rules for correcting an overfunded 401(k) are a little more rigid. You have until April 15 to return the funds, period. The nature of the penalty is also different. The excess amount is taxable in the year of the overfunding, plus taxable again when withdrawn. So, you could pay the penalty multiple times on the same amount. And, in certain cases, overfunding a 401(k) could cause it to lose its qualified status.

The fix: If you suspect an overpayment situation, contact your employer as soon as possible. Adjust your contribution amount before the end of the year and try to get the problem resolved that way.

How Much Do You Need to Retire?

How much do you need to retire

Most Americans simply don’t save enough for retirement. Nearly half of working-age households don’t have any retirement assets, according to the National Institute on Retirement Security. Of those working-age households close to retirement (age 55 and above) nearly two-thirds have less than one year’s worth of their annual salary in retirement savings.

 

 

The goal: a comfortable retirement

So how much do you actually need to retire comfortably? There are many variables to consider, including retirement age, available pensions, and investment returns. Mutual fund broker Fidelity estimates you need enough savings to replace roughly 85 percent of your annual pre-retirement income. Many experts estimate you will have to save between eight and 12 times your pre-retirement annual income to reach this goal.

But the amount you need depends on when you plan to retire. For example, Fidelity estimates a person planning on retiring at age 65 will need to save 12 times their pre-retirement income. By delaying retirement by just five years, to age 70, their savings estimate lowers to eight times your annual income.

This may be why an increasing number of Americans plan on delaying retirement or working during retirement. A majority of workers (51 percent) surveyed in 2016 by the Transamerica Center for Retirement Studies said they plan to continue working during retirement.

Some ideas to consider now

There are actions you can take now to put you in a better position during your golden years:

Bullet Point Contribute as much as possible every year to your employer-provided retirement plans. With a 401(k) pre-tax retirement plan, up to $18,000 can be contributed each year, or $24,000 if you are age 50 or older.
Bullet Point Contribute as much as possible to a Traditional or Roth IRA every year, up to the $5,500 maximum, or $6,500 if you are age 50 or older.
Bullet Point If available, contribute as much as possible to a Health Savings Account, which can be used to offset medical expenses with pre-tax dollars. Individuals can contribute up to $3,400 a year, or $4,400 for ages 55 or older.