Finance News & Insights

IRS releases 2018 retirement plan limits amid key tax controversy

The IRS just released the 2018 retirement plan contribution limits and, unlike last year, there are some key changes — along with murmurs of even greater ones.   

This year, the U.S. Consumer Price Index triggered a cost-of-living adjustment (COLA) increase for a number of plans, so you’ll definitely want to make sure your Payroll folks are ready to update all relevant employee communications, plan procedures and administrative forms.

Most notably for 2018, employees will be able to defer up to $18,500 (up from $18,000) into their qualified defined contribution plans — 401(k), 403(b) and most 457 plans.

Make a note of these …

Here’s where the notable retirement plan limits stand for 2018:

  • 401(k), 403(b) and 457 plan contributions increases to $18,500 (up from $18,000)
  • Catch-up contributions for those 50 and older to 401(k), 403(b), 457(b) plans remain limited to $6,000
  • Catch-up contributions to SIMPLE 401(k) or regular SIMPLE plans are still limited to $3,000.
  • The annual defined-contribution limit from all sources will go to $55,000 (up from $54,000)
  • The employee compensation limit for calculating contributions to plans rises to $275,000 (up from $270,000)
  • The limit on annual IRA contributions remains capped at $5,500
  • The IRA catch-up contribution limit (which is not tied to inflation) remains $1,000
  • The limitation on the annual benefit under a defined-benefit plan goes up to $220,000 (from $215,000)
  • The 401(a)(17) annual compensation limit under increases to $275,000 (from $270,000).
  • The earning threshold used to define a highly compensated employee will remain at $120,000.
  • The earning threshold for a key employee in a top heavy plan (or “officer”) will stay at $175,000.
  • The compensation amount for a “control employee” jumps to $110,000 (from $105,000).
  • The Social Security taxable wage base rises to $128,700 (from $127,200).

Pre-tax limits slashed?

While employers should prepare for the aforementioned limits to take effect in 2018, it’s worth noting that Republicans could be considering major changes to current 401(k) tax rules. What type of changes?

According to the Washington Post, there are reports the GOP is weighing a $2,400 per year limit to pre-tax 401(k) contributions (a $15,600 decrease from the current 2017 limit). After that, 401(k) contributions would be “Rothified” or made on an after-tax basis. In other words, contributions after that limit would be taxed immediately, but gains and withdrawals would be tax-free — like a Roth IRA.

Although President Trump issued a statement claiming there would be no changes to 401(k) contributions, reports are beginning to surface that he’s willing to negotiate with the GOP on this.

Stay tuned.

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