Your 401K in 2017: Here's What's New for You

There aren't many 401K rule changes to keep up with this year, but that doesn't mean you can't bring about some of your own positive changes to your retirement savings. Let's take a look at what you need to know to make the most of your 401K in 2017.

No Changes in the Contribution Limits

The amount the IRS allows you to contribute to a 401K plan this year remains as it was last year — $18,000 if you're younger than 50, or $24,000 if you're older. However, the Feds did make two changes to the retirement savings landscape, which pertain to people on either end of the income spectrum.

1. More May Qualify for the Saver's Credit

Low and middle-income earners should be aware of the Saver's Credit, a tax benefit that rewards those who save for their later years through a 401K or IRA. Depending on your income and filing status, the credit is worth 10%, 20%, or 50% of up to $2,000 of contributions per person (for married couples, that means up to $4,000 of contributions).

Married couples filing joint returns can claim at least a 10% credit as long as their adjusted gross income (AGI) is no more than $62,000. That maximum income amount is $500 more than in 2016, so more households should qualify. However, the most generous 50% credit is allowed only for those couples making no more than $37,000 — the same threshold as in 2016.

The credit/income limits for married couples filing jointly are:

  • 50% if AGI is $37,000 or less
  • 20% if AGI is $37,001–$40,000
  • 10% if AGI is $40,001–$62,000

For singles, or married couples filing separate returns, the maximum amount you can earn and still qualify for a credit is $31,000, which is $250 higher than in 2016. In order to qualify for the maximum 50% credit, your income has to be no higher than $18,500.

Here are the details:

  • 50% if AGI is $18,500 or less
  • 20% if AGI is $18,501–$20,000
  • 10% if AGI is $20,001–$31,000

Keep in mind, a tax credit is much more valuable than a tax deduction because it is a dollar for dollar reduction of taxes.

2. Higher-Income Earners May Get More

On the other end of the income spectrum, the IRS expanded the contribution parameters pertaining to the retirement plans of well-paid workers. For example, contributions — by the employee and/or his or her employer — are limited by how much an employee is paid in total. In 2017, the amount of compensation on which contribution amounts can be based was increased by $5,000 to $270,000, and the maximum total contribution amount was bumped up by $1,000 to $54,000.

What Changes Will You Make?

Even if the two changes noted above don't pertain to you, that doesn't mean you need to — or should — stay the course with your retirement savings. The start of a new year is a good time to re-evaluate your goals and see if you're on track.

Here are two areas to review.

1. How Much You Need

Do you know how much you should have saved by the time you retire? Do you know how much that means you should be saving each month right now? If not, take a few minutes to run some numbers. If you're not saving enough, consider increasing your contributions.

2. How You Should Allocate

Do you know your optimal asset allocation? That pertains to how much of your investment portfolio should be in stocks, and how much in bonds (or stock and bond mutual funds). Vanguard offers a well-designed, free asset allocation questionnaire, so give it a try. Then try to bring your portfolio more in line with your optimal asset allocation.

While tax credits and employer contributions are significant benefits, the most important factors that determine your investing success are the amount of money you save each month, and whether your asset allocation is appropriate for someone of your age and risk tolerance. Take the time to evaluate your individual retirement savings scenario, and see how you can make it even better for 2017.

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