Betty Xiong: 401k Contribution Limits for 2017

For the third year in a row, the IRS has left the maximum employee 401(k) contribution limit at $18,000 per year. The maximum contribution for 2017 is virtually unchanged from 2016 and 2015.

The situation is the same with catch-up contributions. Those represent the additional amount of contributions that you can make to a 401(k) plan if you are age 50 or older. For 2017, that number remains at $6,000, which is also the same as the catch-up contributions in 2016 and 2015.

Every year, in October, the 401(k) contribution limits are review, and – hopefully – recalculated higher based on inflation.

Contribution limits increase more during years when the inflation rate is higher, and less when it is lower, as it has been in the past few years. At times, there have even been concerns that the contribution limits might be reduced, based on a negative inflation rate.

Fortunately however, that scenario has never played out, and the limits have either been increased slightly, or left flat.

401k-contribution-limits

Why Are There No Increases in the Contribution Limits

The short answer is that the annual increases in the Consumer Price Index (CPI) have been very small, like on the order of 2% per year. And since Congress prefers to increase contributions in increments of at least $500, the small percentage increases in the CPI on a yearly basis don’t reach that threshold.

Of course, if we say 2% inflation per year for the past three years, we are really looking at an accumulated increase in the CPI on the order of 6%. Based on contribution limits of $18,000, this should have translated into a $1,000 increase since 2014.

However, since an increase in 401(k) contribution limits will reduce workers taxable incomes, Congress is also reluctant to respond to such changes, in an effort to keep tax revenues flowing in.

But the 401(k) contribution limits are what they are, and despite an absence of increases over the past three years, they still represent very generous limits, and can help you accumulate a substantial retirement nest egg.

The 401k Contribution Limits for 2017

The chart below shows the base 401(k) maximum contribution, the catch-up contribution for employees age 50 and older, and the maximum allocation from all tax-sheltered retirement plans, from 2008 or 2017.

As you can see, the rate of increase over the past nine years has typically moved at a snail’s pace. There has been only a $2,000 increase in the maximum contribution since 2008, and an increase of just $1,000 in the catch-up contribution over the same space of time.

And as you can also see, contribution limits have stagnated in the past, such as 2009 through 2011, when they remain at $16,500 for three years in a row. Even more obvious is the lack of increase in the catch-up contribution for a full six years, when the amount remained at $5,500 from 2009 through 2014.

However, pay attention to the fact that the maximum allocation – which is the total amount that you can contribute to all types of tax sheltered retirement plans in any one year – has increased substantially.

From 2008 through 2017, the maximum increased from $46,000 to $54,000. That’s an increase of $8000 over nine years, which works out to be about 2% per year. This may be the most important statistic in the 401(k) contribution matrix, and were going to spend more time on that in a little bit.

Year	401(k) Maximum	Catch-Up Contribution	Maximum Allocation
2014	$17,500	$5,500	$51,000
2013	$17,500	$5,500	$51,000
2012	$17,000	$5,500	$50,000
2011	$16,500	$5,500	$49,000
2010	$16,500	$5,500	$49,000
2009	$16,500	$5,500	$49,000
2008	$15,500	$5,000	$46,000

*For each year, the maximum allocation is increased by the amount of the allowable catch-up contribution (which applies to workers 50 and older). For example, for 2017, the maximum allocation if $60,000. This is the maximum allocation of $54,000, plus the $6,000 catch-up contribution.

The Contribution Limits Also Apply to Roth 401(k) Contributions

Contribution limits for Roth 401(k) contributions are the same as they are for traditional 401(k) contributions. That means you can contribute up to $18,000 per year to either a regular 401(k) plan, or a Roth 401(k) plan. More likely, you will want to contribute to both, in which case you’ll have to allocate how much of the $18,000 limit will go into each part of your 401(k).

Not coincidentally, the 401(k) limits are virtually the same as the limits for both the 403(b) plan and the Thrift Savings Plan (TSP).

In addition, any employer matching contributions to the plans are not included in the employee contribution limits listed above. Your employer can contribute a matching contribution that exceeds the $18,000 regular contribution limit, or even the combined $24,000 limit if you are age 50 or older.

Rather than Fretting Over the Lack of Increase in the Contribution Limit…

For most workers, the flat or level 401(k) contribution limits over the past three years isn’t the real problem. The real problem is a lack of employee participation. A large percentage of employees do not participate in a 401(k) plan, even though one is offered by their employer.

Note also that the median value of a 401(k) plan nationwide was just $18,433 in 2015, which means that 50% of employees have more than this number in their 401(k), but 50% had less. That represents a single year of regular contributions, plus a little bit of investment income earned on it. Clearly then, 401(k) contribution limits are not the real culprit here.

The moral of the story is that the biggest single problem with 401(k) plans is that not enough people are participating, and based on the median 401(k) value, it’s also clear that the great majority of employees are not coming close to making the maximum contributions anyway.

Despite the fact that contribution limits have not been increased in three years, $18,000 still represents a lot of tax-deferred savings potential. Do what you can to get as close to the maximum contribution possible, especially as you move closer to retirement.

Taking Advantage of the Maximum Allocation

The biggest number on the chart above for each year is in the Maximum Allocation column. That is the maximum amount of money that you can contribute to all tax-sheltered retirement plans that you have available to you. It’s actually a more important factor than most people realize.

Despite the fact that the 401(k) contribution limits haven’t been increased in three years, the average person isn’t coming close to maximize their potential contributions to retirement plans of all types. The 2017 maximum allocation for all plans is a very generous $54,000, and was the one 401(k) number that actually increased from 2016 to 2017.

That’s the amount of money that you can contribute even beyond your 401(k) plan. For example, you can contribute up to $5,500 per year (or up to $6,500 if you are 50 or older) to an IRA, whether it is a traditional or Roth IRA. You may able to make tax-deductible contributions to a traditional IRA, or non-tax-deductible contributions to a Roth IRA, if your income is within the limits for either plan.

But even if your income exceeds the threshold to make a tax-deductible contribution – in addition to being covered by an employer plan – you can still make nondeductible contributions to a traditional IRA, regardless of your income.

That may not get you a tax deduction, but it will enable you to put more money into a retirement plan where your investment earnings will accumulate on a tax-deferred basis. A $5,500 IRA contribution, in addition to contributing $18,000 into a 401(k) plan, will increase your contribution to $23,500 per year.

But beyond IRAs, there are also several types of tax-sheltered retirement plans for the self-employed, including SEP and SIMPLE IRAs. If you have a side business, you can maintain these retirement plans for that business. They will allow you to contribute more money into a tax-sheltered plan. You can go as high as $54,000 total, which gives you plenty of room to make more contributions.

What We Can Expect of Contribution Limits in the Future

The good news is that we have been in a prolonged time of low inflation. That’s good news in regard to the cost of living, even though it has kept a lid on maximum 401(k) contribution limits. Since that seems to be a long-term pattern, we should probably expect several more years of either low or nonexistent increases in the contribution limits.

But that makes an even stronger case for maximizing the contributions that you make within the limits that we have, as well as investigating the possibility of contributing to the other retirement plans, such as IRAs or the various plans that are available for the self-employed.

We have to work within the limits that we have, and recognize that they are more than enough to help us reach our retirement goals. Those limits will allow us to do just that, even if they don’t increase significantly in the future.