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Oct. 27 — To those who have already maxed out on their 401(k) plan contributions, the IRS’s announcement of contribution limits for 2017 has bad and good news. The bad news is that the contribution limits aren’t increasing. The good news is that those prompted to diversify their savings in terms of tax consequences may be better off anyway.
The current basic 401(k) plan annual contribution limit of $18,000 will remain unchanged in 2017, the IRS said Oct. 27. Similarly, the annual catch-up contribution limit for those age 50 and over will stay at $24,000 next year, the agency said.
The majority of people affected by the contribution limit are those who are “highly compensated and higher net worth investors,” Joe Goldberg, director of retirement plan services for Buckingham Asset Management in St. Louis, told Bloomberg BNA in an e-mail. These people “would actually benefit by diversifying the tax treatment of the dollars they set aside for retirement,” he said.
Most people won’t be affected by the limits not increasing, Goldberg said. That’s because “most non-highly compensated participants aren’t maxing out their contributions in the first place,” he said.
For those who “are reaching that limit hopefully it leads them to save outside of their retirement plans as income may rise and as inflation is expected going forward,” Goldberg said.
Goldberg said there are benefits for retirees who have, in addition to retirement plan investments, “invested outside of a retirement plan in a taxable account.”
They can take advantage of “long-term capital gains that will most likely be at a lower rate than the ordinary income tax rates they will have to pay on withdrawals from their retirement account,” he said.
“So, if half of somebody’s living expenses are covered by taking long term gains and the other half is funded by their retirement account,” a retiree “could very well reduce the amount” that he or she pays in taxes “just by using that planning strategy,” Goldberg said.
It would be good if more Americans learned that “just because the maximum in their 401(k) plan is $18,000, this doesn’t mean that the maximum they can save is equal to that,” he added.
The IRS notice provides a listing of dollar limitations applicable to qualified retirement plans as adjusted for inflation.
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Text of the IRS notice is at http://src.bna.com/jG7.
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