401k contribution limits for 2018

The IRS ruling on next year’s 401k, IRA and HSA limits is finally here and investors who already max out their 401k are getting some good news.

For the first time since 2015, the IRS has bumped up the 401k limit. In 2018, it the limit will be $18,500, up $500 from the current $18,000. This new change also applies to other retirement accounts that mirror the 401k limit like the 403b, most 457 plans and the TSP.

The catch up contributions for those over 50 remain unchanged at $6000 for 2018 meaning the maximum deferral anyone can make is $24,500 this year, up from $24000 last year.

The benefit for heavy investors is two fold.

First, you get to reduce your taxable income by another $500 this year which can save someone in the 25% tax bracket $125 on their tax bill. That’s additional money that can be invested in a taxable account to continue growing your portfolio.

Second, the 401k is already one of the best ways to grow your portfolio and additional money in that account will help your long term results.

That means, you not only get to keep more of your money that would otherwise be taxed but can now be invested or spent but you also get tax-free growth on the additional $500 for as long as the money is in the 401k.

$500 may not seem like much but $500 extra each year for thirty years will mean you’ll have $66,000 extra in your account after 30 years. On top of that if you invest the extra $125 in tax savings every year in a taxable account, you’ll have an extra $13,000 in that account(15% tax rate assumed).

That same investment($500 every year) would only be worth $52,000 in a taxable account(15% tax rate assumed) for that same period. That’s a pretty big difference and shows the power of tax-advantaged investing and why I’m excited to get the $500 bump this year.

Unfortunately, the IRA limits, both Roth and traditional, remain unchanged at $5500 but the phase-out ranges for those for both are going up a little bit. That can help those on the cusp of being eligible for the traditional IRA deduction or Roth IRA eligibility.

The other piece of good news not mentioned in the IRS releases is that the HSA contribution limit is also going up this year. People with single coverage will have be able to save an additional $50 this year to a total of $3400 and those with family coverage get an extra $150 in tax-advantaged space up to $6900.

I wrote about the benefit of an HSA before but in essence, it’s the best tax-advantaged savings account available and any additional money you can squeeze into it is money well spent. It’s essentially tax-free on both ends(assuming you use it for medical expenses on the back end) and saves you from FICA taxes as well.

Overall, this is great news for investors everywhere especially those of us striving for financial freedom. Maxing out tax-advantaged space is a must if you are lucky enough to be able to do it and 2018 will give us more space to work with.

I’ll certainly be happy to be able to add another $550/year into my tax-advantaged space and hope others are too. I only wish the IRA limit went up to $6000 too as it’d be nice to just make it an even $500/month for the max out!

Are you already maxing out your 401k and if so, are you planning to take advantaged of the additional tax-advantaged space?

9 thoughts on “401k contribution limits for 2018

  1. Thanks for this update Time. I was not aware, but it is great news. Both my wife and I participate in our respective 403Bs and we have a family HSA plan. We will definitely look to take advantage of these new limits. We live in a high tax county in a high tax state, so any bit of tax relief is a great thing. Tom

  2. This is a nice update. I really wish the contribution limits of the IRA would have went up. I will be able to make some good use of the extra money in my HSA though. Thanks for the update!

  3. Nice article and thanks for the update. I love HSA.

    HSA is one of the best (triple tax benefit) and most under utilized retirement accounts. When I was working, I always maxed out my contributions and never used HSA to pay for medical expenses.

    Instead, I paid for medical expenses from standard savings and left the HSA fully invested while re-investing all the dividends.

    Now, it has grown into a very nice nest egg that I can use to pay tax free for medical expense later in life or even non-medical expenses to reimburse myself of past medical bills I payed out of my regular savings.

    Mr. ATM
    p.s: Nice article.

    1. Yea that would suck although there’s been lots of talk around the 401k, even some around making the maximum even higher!

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