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For 2017, the employee contribution limit for employer-sponsored retirement plans such as 401(k), 403(b), and most 457 plans will remain unchanged, mostly due to a lack of inflation. However, the contribution limit is so high that it leaves the average American with plenty of room to boost their savings rate. Here's what you need to know about the limits and what a small additional contribution could mean to you.
The 401(k) limits for 2017
For the 2016 and 2017 tax years, participants in employer-sponsored retirement plans can contribute up to $18,000 per year, with an additional $6,000 "catch-up" contribution allowed for participants age 50 or older.
Keep in mind that these limits only refer to elective deferrals -- that is, the 401(k) contributions you choose to have withheld from your paycheck and invested on a pre-tax basis. It does not include employer matching contributions.
The 401(k)/403(b)/457 contribution limit from all sources has actually increased by $1,000 for 2017 to $54,000 ($60,000 including catch-up contributions), which means that employers have more room to make contributions, if they so desire.
How much does the average American contribute?
According to Fidelity, the average 401(k) participant's contribution is an annualized rate of $10,160 per year, but $3,610 of this amount comes from employer matching contributions or profit sharing. This translates to an average employee contribution rate of $6,550 per year, far below the maximum.
The overall 401(k) contribution rate for the average participant is 12.7% (a historical high, by the way), and the average employee contribution rate is about 8.2% of salary. About 13.6% of participants increased their contribution rate in the first quarter of 2016 -- also a record high -- and even though the limits won't go up in 2017, a similar trend is certainly possible thanks to the high contribution limits.
Most people can still increase their contributions -- by a lot
The bottom line is that even though the 401(k) contribution limits aren't changing for 2017, the reality is that it won't affect the vast majority of workers. Chances are, you still have room to increase your contributions if you'd like and that the limits won't be too, well, limiting.
Most people contribute at least enough to take full advantage of their employer's matching program, which is certainly a good start. However, it may not be enough to provide you with the financial comfort you want in retirement.
The good news is that even a small increase in your 401(k) contributions can have a big impact over the long term. For example, if you earn $50,000 per year and you and your employer both contribute 4% of your salary, you could have just under $600,000 saved after 30 years, assuming the stock market's historical average rate of return continues. However, if you increase your personal contribution rate to 5%, your nest egg jumps to $674,000. At 6%, you could have $749,000. Imagine if you save aggressively – say, 10% or more of your salary.
How much should you contribute?
While there is no universal answer, I generally suggest that people aim to contribute at least 10% of their salary to their 401(k) or other retirement accounts, not including any employer match. You don't need to get there right away -- try increasing your contribution rate by 1% per year until you're where you want to be or increase it whenever you get a raise. You might be surprised at how quickly the extra savings add up.
The bottom line is that the 401(k) contribution limits are rather generous, and are more than enough for most people to aggressively take advantage of the tax-deferred growth potential of their accounts. How much more could you comfortably afford to contribute? Your paychecks will drop a little, but you'll thank yourself later.
