Retirement Account Changes in 2017

After a year of political upheaval and economic uncertainty, it might come as a relief that 2017 holds few surprises for retirement savings.

For the fourth year in a row, tax-exempt contribution limits for Individual Retirement Accounts (IRAs) and workplace 401(k) retirement savings plans will remain unchanged. That means it will be difficult, though not impossible for people nearing retirement age to make up ground if they have underfunded their retirement account.

Individuals can add $5,500 (plus an extra $6,000 for those over 50) during the year to an IRA and $18,000 to a 401(k) plan and not pay taxes on the money invested. Contributions more than the maximum are taxed as regular income. Both plans are designed to encourage retirement saving.

IRA and 401(k) plans are tax-deferred, meaning the account holder doesn’t have to pay taxes on the money even as it grows. When funds are withdrawn, typically after retirement, they are taxed as ordinary income.

How to Play Catch Up

If you are 50 or older, and trying to play catch-up with retirement savings, the law allows you to put an additional $6,000 into an 401(k) plan and an extra $1,000 into an IRA. Getting a 5% return on the additional $7,000 a year you invest between 50 and retiring at age of 67, would mean an additional $180,882 to your account.

Another way to help retirement savings is to delay receiving social security benefits. You are eligible to start social security at 62, but if you want until you’re 66, your annual payment will increase 25% and if you wait until 70, it will go up approximately 62.5%.

How Inflation Affects Retirement Savings

The national inflation rate is used to set tax-deductible contribution limits, and very low inflation resulted in the limits remaining unchanged in 2017. In most cases, employers will match employee contributions to 401(k) plans up to a certain point, adding to their advantage as a retirement-saving vehicle.

Both IRA and 401(k) accounts come with tax penalties for retirement money withdrawn before age 59 ½. But account owners have control over how to invest their money. IRA owners can choose from a wide arrange of investment opportunities, while workplace 401(k)s offer limited choices selected by employers. When an employee leaves a job, a 401(k) can be rolled over into an IRA, a new employer’s 401(k) or simply left in the original employer’s plan.

Employer 401(k)s frequently charge fees, often not transparent, so it pays to consider the options if you can roll over the money.

Those who contribute to 401(k)s can also make tax-deferred deposits into IRAs up to a point. Employees with 401(k)s who earn as much as $62,000, or couples who earn up to $99,000, can defer taxes on IRA contributions of $5,500. Those over age 50 can defer a $6,500 contribution. The tax deduction is then phased out for individuals earning up to $72,000 or couples with incomes of as much as $119,000.  Consult the IRS or financial services company website to calculate the phase out.

Workers who don’t have a 401(k) through their jobs can claim the $5,500 deduction for contributions to an IRA no matter how much they earn. People over 50 can deduct up to $6,500.

Roth IRAs and Retirement Savings

The IRS offers another alternative for savers, the Roth IRA. Roths are like a mirror image of conventional IRAs in that contributions are taxed but the investments grow tax free and withdrawals taken after age 59 and one-half are tax exempt. But Roths come with income limits. Individuals earning less than $118,000, and couples earning less than $186,000, can make contributions that can yield fully tax-free retirement income when withdrawn. Contribution limits are $5,500 ($6,500 if over 50) for both single are married taxpayers.

Both individuals and couples earning somewhat more than the limits can contribute to a Roth, but eligibility is phased out above the thresholds. The maximum income to participate is $133,000 for an individual and $196,000 for couples.

If you contribute more to a retirement account than the tax code permits, the excess balance is subject to tax until it is removed.

Two other IRAs for the self-employed will have slightly higher contribution levels in 2017. The limits for SEP IRAs and solo 401(k)s contributions will both rise $1,000 to $54,000. The actual amount that can be contributed is based on work income.

There is also a special provision in the 2017 tax code for victims of Hurricane Matthew, a powerful storm that impacted parts of the Southeast in 2016. Residents of parts of North Carolina, South Carolina, Georgia and Florida will be allowed to take hardship distributions and loans form retirement accounts. So are people who have children, parents or grandparents living in the disaster area. Only distributions taken before March 15, 2017 are eligible. Consult the IRS for more information.