This article was updated Monday, October 23, 2017.
It's not every day you see IRS news in the headlines and actually want to click through, but anyone with plans to retire someday may want to pay attention: The agency just announced new retirement savings contribution limits for 2018 based on cost of living adjustments. Here's what's changing, and how it could impact you.
What's New in 2018
Employer-sponsored retirement account contribution limits are going up. Employees with a 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan can contribute up to $18,500 of their own pay toward retirement in 2018, an increase of $500. (Whatever your employer matches is not included in this amount.)
Traditional Individual Retirement Account (IRA) income phaseout ranges for deductions are increasing. If you and your spouse are not covered by a retirement plan at work, you're allowed to deduct what you contribute to a Traditional IRA from your taxes. However, that deduction gets phased out, based on your income and filing status, if you or your spouse has access to a workplace retirement plan. The income ranges that determine the phaseout, however, were increased for 2018.
Roth IRA income phaseout ranges are increasing. Whether you're eligible to contribute a full or reduced amount (or any amount at all) to a Roth IRA is determined by your income. For 2018, the income ranges at which your contribution is phased out will go up.
Should You Be Maxing Out Your 401(k)?
We know what you're thinking: It's great that I can stash another $500 away for retirement, but I'm nowhere near coming close to that max amount. Does that mean I'm doomed?
How much you put into your 401(k) is really based on your individual situation. For some people, reducing take-home pay by $18,500 a year so that money can go toward retirement is totally doable; for others, it means not being able to pay the bills. Some savers may also not want to put the full amount into their 401(k) because they'd rather split their retirement savings between, say, a Traditional 401(k) and a Roth IRA, which have different tax treatments.
Ultimately, retirement is an important goal that shouldn't be put on the back burner. So here's something to consider: If you can afford to contribute enough to take advantage of any 401(k) matching you get through work, then try to put at least that much away. Otherwise, you may be overlooking free money that could help you live the retirement you want decades from now.
If you can't meet the match, then stash away whatever percentage you can — even 1% to 2% can make a difference in the long run.