Insights to help you plan, live and invest well.

What can I contribute? What should I contribute?

When working with employees in 401(k) accounts, most everyone wants to know what they should be contributing. First, you need to know what you can contribute. Let’s review the 2017 limits:

 

2017 limits

Employee salary deferral limit to 401(k) plans

$18,000

($24,000 if you are age 50+)

Maximum compensation for qualified retirement plans

$270,000

Annual addition limit

$54,000

($60,000 if you are age 50+)

Let’s dive deeper into what the above numbers mean.

The employee salary deferral limit is the limit on how much you as an employee can put away from your paycheck. If, however, your employer contributes money on your behalf (perhaps in the form of a match or a profit sharing contribution), the maximum amount that can be added to your account for 2017 is $54,000 – the annual addition limit. If you are earning a large salary, only the first $270,000 of your income will be considered when calculating contributions to your plan.

Now comes the magic question of what you should aim to be contributing. Beyond the obvious and useless answer of “it depends,” the simple answer is the annual maximum. The practical answer is as much as possible with increases each year. An industry rule of thumb of the moment is 10 - 15%.

I highly recommend looking into the tools and calculators available through your 401(k) provider’s website. There should be a take-home-pay calculator that enables you to input your salary and tax rates to see how increasing your contribution may affect your paycheck.

To think about it another way, consider Social Security taxes. Between the employee and employer, 12.4% is being contributed to the program (6.2% each) to supplement those retired or suffering from a disability. Compare that to what you are putting aside for yourself each year.

Raymond James and its advisors do not provide tax services. Please discuss tax matters with the appropriate professional.