As the calendar flips to 2018, do you need to make any adjustments to the amount of money you’re depositing monthly into your 401(k)?
You might. That’s because the contribution limit for 401(k) programs is rising in 2018. It’s not jumping much – you will be able to contribute a maximum of $18,500 to your 401(k) in 2018 if you’re under age 50 – but the increase means that you might want to change the amount you contribute to your fund with every paycheck.
Edward Dressel, president of retirement-planning software maker Retire Ready Solutions in Dallas, Oregon, said that the increase in the contribution limit actually runs counter to what many financial experts expected for 2018.
“Despite the rumors swirling around potential big changes to 401(k)s, the 2018 changes currently appear to be more modest,” Dressel said. “Contrary to the rumors about cuts to the contribution limit, the IRS is currently scheduled to increase the 2018 contribution limit by $500.”
And if you’re 50 or older? In 2018, you can contribute even more to your 401(k). The new maximum contribution limit for this age group is $24,500.
The goal, if you want a happy retirement, is to contribute as much as you can afford each year into your 401(k) or other retirement savings accounts. Can you can afford the new high of $18,500, or $24,500, depending on your age? Make sure that you adjust your contributions so that you are depositing that much into yours this year.
Another significant change to 401(k)s in 2018? Those who were hit by the hurricanes that tore through the country in 2017 can take hardship distributions from their 401(k) plans to pay for storm-related expenses through Jan. 31, 2018, without having to wait out a period afterward in which they can’t make catch-up payments.
Normally, people who take hardship distributions have to wait six months after doing so to make future contributions to their 401(k) plans. This ban, though, is waived for people who use their 401(k) funds to pay for storm-related expenses.
Be aware, though, that these hardship withdrawals do come with consequences. First, you’ll have to pay a 10% early withdrawal penalty if you’re under the age of 59-and-a-half. You’ll also have to pay income tax on all withdrawals, no matter how old you are.
Because of this, financial pros say that you should only take these hardship withdrawals if you absolutely need to.
Hurricane victims can also take a loan against their 401(k) accounts. People can borrow up to 50% of their vested account balance up to $50,000, and can then use this money to cover storm-related damages. Again, though, financial consequences do come with these loans. You’ll have to pay it back, obviously, with interest. You might also face loan fees. You won’t, though, have to pay an early withdrawal fee or income tax.
Even without fees and penalties, removing dollars from your 401(k) plan can hurt your retirement goals.
“Both cases should only be used as an absolute last option,” said Dave Bar, a certified public accountant and founder of the financial-advice site CommonCentsMillennial.com. “Losing out on the growth of these accounts can be very damaging to your future financial health.”
The saver’s credit is also getting a bit easier to qualify for, even if you deposit more in your 401(k) in 2018. Under new IRS rules, you can earn $500 more and still qualify for the retirement savings contribution tax credit when you file your income taxes.
Individuals who earn up to $31,500 can still qualify for the tax credit. Those filing as the head of a household can earn up to $47,250 and still qualify for the credit, while those who earn as much as $63,000 a year as part of a married couple will still be eligible for the tax credit.
The tax credit is designed to encourage and reward those who save for their retirement. It’s worth from 10% to 50% of your contributions to a retirement account through the year up to a limit of $2,000 for individuals and $4,000 for couples.
Once change that isn’t here yet but that could have an even bigger impact on consumers? Auto-portability.
Dressel said that consumers should keep an eye out for any advances in this arena. With autoportability, employees who leave one employer for another could have their 401(k) accounts automatically rolled over into their new employer-sponsored plan.
That’s a big improvement from what happens now. Today, employees when they leave a job can either cash out their existing 401(k)s, which comes with big penalties, or they can roll them over into an IRA. This avoids penalties, but often employees stop making contributions to these new IRAs they’ve formed. That’s because they are instead contributing to a new 401(k) plan offered by their new employer.
Autoportability could change this, Dressel said.
“The potential upside of helping those with smaller balances stay invested in a retirement plan could be huge,” Dressel said.
As always, it’s important to note that everyone’s financial goals are different, so if you have additional questions, be sure to contact a financial advisor who can review your specific situation.
Are you planning on contributing more to your 401(k) in 2018 or possibly in other investments? Let us know in the comments below!
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