To save more for their retirement, many taxpayers meet with their financial advisors at the beginning of each year to determine how much they can now add to their retirement nest eggs for the current and upcoming tax years. One thing to look at is whether tax contribution limits – or income qualifications for certain accounts – have risen. Here's what you need to review to make realistic projections for your retirement planning.
Saver's Tax Credit
The Saver's Tax Credit is a non-refundable tax credit created by Congress to encourage lower-income taxpayers to contribute to their retirement plan. It gives eligible individuals and couples a tax credit for contributions made to IRAs and employer-sponsored retirement plans. This tax credit helps to offset the first $2,000 contributed to an individual's retirement plan ($4,000, if married filing jointly). To be eligible for the tax credit, a taxpayer must meet the following requirements:
- Will be at least 18 years old by the end of the tax year
- Is not a dependent of another taxpayer
- Is not a full-time student
- Does not earn more than the amount indicated in the chart below (based on filing status)
The following chart shows the percentage of tax credit the taxpayer is allowed on contributions, based on his or her tax-filing status and income. For example, in 2017 an individual who is married, files a joint income-tax return and has an adjusted gross income (AGI) of no more than $37,000 will be allowed to claim 50% of the first $4,000 that the couple contributed to their retirement plans. The tax credit for the year cannot exceed $2,000. A single individual can have an AGI of up to $18,500 and claim a tax credit of up to $1,000 for a contribution of up to $2,000. Here are the details for 2017 and . Note: Only some figures rose in 2017.
|Credit Rate||Married – Joint Return||Head of Household||Other Categories of Filers|
|50%||Not more than $37,000||Not more than $27,750||Not more than $18,500|
|20%||$37,001 – $40,000||$27,751 – $30,000||$18,501 – $20,000|
|10%||$40,001 – $62,000 [$61,500]||$30,001 – $46,500 [$46,125]||$20,001 – $31,000 [$30,750]|
|0%||$62,000+ [$61,500+]||$46,500+ [$46,125+]||$31,000+ [$30,750]|
This tax credit was made available from 2002 to 2006 under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), but was made permanent under the Pension Protection Act of 2006 (PPA). (To read more about the PPA, see Pension Protection Act Of 2006 Becomes Law.)
IRA Contribution Limits
Individuals may contribute the lesser of 100% of compensation or $5,500. Those who are age 50 and older by the end of the year may contribute an additional $1,000. These additional amounts are referred to as "catch-up contributions" because they allow those who were unable to fund a retirement account in earlier years to catch up on funding their retirement nest egg. If you have a retirement plan at work (or your spouse does, if you're married filing jointly), your ability to make tax-deductible contributions to an IRA (or any contribution to a Roth IRA) may be reduced or removed. Click here for details.
Salary Deferral Limits
Regular 401(k), 403(b), most 457 plans and the federal governments Thrift Savings Plan. You can defer up to 100% of your compensation, up to $18,000 in both 2016 and 2017. Making pretax salary deferral contributions to your employer-sponsored plan is beneficial because it reduces your current taxable income. These amounts will be taxed when withdrawn, but projections usually assume that the withdrawal will take place during your retirement years, when your income and income tax rate are likely to be lower. At 50 and over, you can add a catch-up contribution of $6,000, for a total of $24,000 per year.
Taxpayers who want to contribute the maximum salary-deferral amount may need to start early in the year. Starting early will allow you to spread the amount over the year and therefore lessen the effect of reducing your current disposable income. For instance, if may be easier to contribute $1,000 per month, instead of $12,000 all at once.
Salary-Reduction SEPs (SARSEPs): The salary-deferral limit for 2016 and 2017 is $18,000 or 25% of their compensation, whichever is less, plus an additional $6,000 catch-up contribution for participants who are at least age 50 by the end of the year. (Note that no new SARSEP plans were permitted to be founded after 1996, but existing plans were allowed to continue.)
SIMPLE IRA & SIMPLE 401(k): The salary-deferral limit for 2016 and 2017 is $12,500, plus an additional $3,000 catch-up contribution for participants who are at least age 50 by the end of the year.
SEP IRAs and Solo 401(k)s. The employer-contribution portion of these plans for small business owners and the self-employed rose from contribution limits of $53,000 in 2016 to $54,000 in 2017. The compensation limit used in calculating savings went to $270,000 in 2017 from $265,000 in 2016. Retirement Plans for the Self-Employed explains more.
While these limits are established under federal law, your employer may implement lower limits. For instance, your employer may limit your salary deferral contributions to your 401(k) account to 10% of your compensation. If your compensation for the year was $50,000, this means you would be eligible to make salary deferral contributions of no more than $5,000 ($50,000 x 10%) for the year to the account.
Employer Contribution Limit
For SEPs, IRAs, profit-sharing plans, money purchase pension plans and 403(b) accounts, your employer may contribute up to $53,000 to your account for 2016 and $54,000 for 2017. For 401(k) and 403(b) plans, this $54,000 (or $53,000) includes amounts you may contribute as salary deferrals, but does not include your catch-up contributions. As such, if you are at least age 50 by the end of 2017, your total contribution can be $54,000 + $6,000 catch-up. The amount your employer contributes is never taxed to you until it is withdrawn from your retirement account. Ask your employer about the withdrawal rules for its retirement plan.
For SIMPLE plans, your employer may either match your contribution to the plan dollar-for-dollar up to 3% of your compensation, or make a non-elective contribution of 2% of your compensation up to $265,000 for 2016 and $270,000 for 2017. A non-elective contribution is made on behalf of each eligible employee, regardless of whether he or she makes a salary-deferral contribution. This is unlike a matching contribution, which is made only on behalf of those who make a salary-deferral contribution. Be sure to ask your employer about the type of contribution he or she will make each year. (For more on SIMPLEs, see SIMPLE IRA vs. SIMPLE 401(k) Plans and Introduction to SIMPLE 401(k) Plans.)
The Bottom Line
For some years now, savers have been given more opportunity than ever to grow a sizable nest egg for the future. If you haven't taken advantage of these savings opportunities – or aren't saving as much as the law permits – this year might be a good time to start. Be sure to consult with your tax professional about how you can benefit most from making your retirement contributions. And where possible, contribute as much as you can; this will help you to reach your nest-egg goal by your projected deadline or even sooner.