What do updated annual savings limits mean for planning?

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The IRS recently released the indexed dollar limits for qualified retirement plans for 2017. The amounts remain largely unchanged, due to low inflation rates, but personal investors and retirement plan fiduciaries should review the update for smart saving opportunities.

401(k), 403(b), 457 Plan deferral Limit: 2016: $18,000, 2017: $18,000
“Catch-up” Contribution >age 50: 2016: $6,000, 2017: $6,000
Defined Contribution Total Dollar Limit: 2016: $53,000, 2017: $54,000
Highly Compensated Employee definition: 2016: $120,000, 2017: $120,000
Click here for full IRS announcement of 2017 limits

While fiduciaries believe the limits are out of reach or exceed the savings needs of lower-income retirement plan participants, under-savers that need to save big to get on track can benefit from reminders about the limits and encouraging savings increases in general. Only 12% of plan participants contribute the maximum amount yearly*, and 29% of those over age 55 have $0 retirement savings (excluding Social Security), while the average for those between ages 55-65 have $104,000**.

Higher-wage earners also often under-save. Only 34% earning over $100,000 hit the limits*, and the consequences to their retirement lifestyle could be significant. Even if Social Security remains intact, it will replace less than 25% of the projected retirement income need for those earning more than $120,000, making independent savings essential.

Retirement plan design has evolved to encourage adequate savings through automatic enrollment, auto-escalation, etc., but too many workers still delay retirement saving and then save too little. Delaying savings is a risk for many reasons, including the fact that some workers earning over $120,000 may not have access to the full deferral limits every year. As “highly-compensated employees” (HCE’s) they may have lower limits imposed on them if lower-paid workers at their company don’t participate, making plan design and participation critical. There is some good news for certain HCE’s who are behind in their savings, however. The catch-up provisions that allow those over age 50 to contribute an additional $6,000 per year are not subject to the HCE restrictions, so even if their regular contributions are limited, they can still contribute the full $6,000 catch-up amount.

Even for those whose net worth seems adequate to provide for retirement needs, maximizing retirement plan contribution provides financial benefits. Certain business owners, for example, can take advantage of higher plan limits, which serves to reduce current taxes and diversify net worth. In many cases much of their net worth is tied to the value of their business and building these retirement accounts allows more flexibility in cash flow and tax planning during retirement.

For our personal wealth clients, reviewing available retirement plans, limits, and investment options is an integral part of ensuring that their financial life and goals are aligned. Contributing up to the allowable limits may not always be the answer, but ensuring that you are contributing the right amount and in the right types of accounts for your situation will make a meaningful difference in your ability to retire when, and how, you envision.

*Vanguard 2015 Vanguard study of 4.1 million people.
** GAO study, 2015.

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