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Maximum 2017 401(k) Deduction

By Matthew Frankel, CFP® - Dec 9, 2016 at 6:23AM

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How much could your 2017 retirement contributions save you?

Image source: Getty Images.

The short answer is that the maximum 401(k) deduction for an individual in 2017 is $24,000, but that doesn't tell the entire story. Some of this amount has to do with the age of the account holder, and employers can boost your 401(k) contributions well beyond this amount. Here's the maximum 401(k) contribution deduction for 2017 and what it could mean for you.

The 2017 401(k) contribution limits

For 2017, employees can choose to defer up to $18,000 of their salary into their employer's 401(k) plan, with an additional $6,000 catch-up contribution allowed for participants age 50 or older.

Total contributions to a 401(k), including employer matching and other types of contributions, cannot exceed $54,000 for the year, or your total compensation, whichever is less. Including the $6,000 catch-up provision for participants over 50, this brings the maximum total 401(k) contribution to $60,000 for the 2017 tax year.

In order to max out your 401(k), however, your employer is going to need to provide a generous matching program. Additionally, it isn't necessary (or practical) for many people to max out their own 401(k) contributions -- the point is that the limits are rather high, so most people have the ability to save more than enough for their retirement.

Above-the-line deduction

Retirement contributions are an "above-the-line" deduction, which means that unlike many other tax deductions, you can take advantage of it whether you itemize deductions on your tax return or not. In fact, 401(k) contributions typically don't need to be deducted at all. Rather, your W-2 from your employer will show your annual wages already reduced by the amount of your contributions.

How much could it save you?

The maximum 401(k) deduction of $24,000 could save someone in the top tax bracket $9,504 on their 2017 taxes, but the vast majority of people don't come close to contributing this amount. So, let's take a look at a more "real world" example.

Let's say that you're single and earn $70,000 in 2017. Your employer is willing to match your 401(k) contributions dollar for dollar up to 5% of your salary, and you decide to defer 8% of your salary into your account, for a total contribution rate of 13% of your salary, or $9,100. Of this, the $5,680 that you elected to defer from your salary would reduce your taxable income. Since your income puts you in the 25% tax bracket for 2017, your 401(k) contributions represent a tax savings of $1,420.

Using your salary and marginal tax rate (tax bracket), you can figure out how much you could save in taxes by increasing your own 401(k) contributions in 2017.

Another potential tax benefit for 401(k) savers

In addition to the tax-deferred nature of 401(k) contributions, low- to moderate-income taxpayers can take advantage of another tax benefit, known as the Retirement Savings Contributions Credit, or the "Saver's Credit" for short.

This credit is worth up to 50% of your first $2,000 of contributions ($4,000 for couples) to qualifying retirement accounts, including your 401(k), so if you qualify, this could be an additional incentive to set money aside for your future. Here are the adjusted gross income (AGI) limitations and credit percentages for 2017:

Credit -- % of Contribution

Married Filing Jointly

Head of Household

All Other Filers

50% of contribution

Up to $37,000

Up to $27,750

Up to $18,500

20% of contribution

$37,001-$40,000

$27,751-$30,000

$18,501-$20,000

10% of contribution

$40,001-$62,000

$30,001-$46,500

$20,001-$31,000

No credit

AGI over $62,000

AGI over $46,500

AGI over $31,000

Data source: Internal Revenue Service.

Retirement savings -- the best tax break of all?

When you consider the combination of the immediate tax benefits of retirement saving, as well as the long-term compounding power of invested money, retirement saving could be the smartest tax move you can make. Not only can you save thousands of dollars right away, but you could build up hundreds of thousands of dollars (or more) by the time you're ready to retire.

With that in mind, the important question you should be asking yourself is: "How much can I afford to contribute to my 401(k) to maximize my own tax benefits?"

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