2018 qualified plan contribution/benefit limitations
Keeping your hard-earned money safe is an important part of retirement. It’s not for everyone, though. For those who don’t mind the risk, there are many options for saving for retirement. Make sure you are aware of what your employer offers and take advantage of maximizing your contributions.
Investopedia defines qualified plans as follows. A qualified retirement plan meets the requirements of Internal Revenue Code Section 401(a) and is therefore eligible to receive certain tax benefits. Such a retirement plan is established by an employer for the benefit of the company’s employees. Qualified retirement plans give employers a tax break for the contributions they make for their employees. Qualified plans that allow employees to defer a portion of their salaries into the plan also reduce employees’ present income-tax liability by reducing taxable income.
Here are some of the different qualified plans available along with their contribution limitations. Check with your employer to see what is available for you.
1. Money Purchase Pension Plan
Annual additions cannot exceed the lesser of 100 percent of the participant’s compensation or $55,000.
2. Profit-Sharing Plan
Annual additions to individual plan participants cannot exceed the lesser of 100 percent of the participant’s compensation or $55,000.
3. 401(k) Plan
Employer contributions: Up to 15 percent of covered payroll.Elective employee deferrals: $18,500 ($24,500 if age 50 or older)Allocation limits: Total of employer contributions and elective employee deferrals cannot exceed the lesser of 100 percent of a participant’s compensation or $55,000.
4. Simplified Employee Pension (SEP) Plan
Annual additions cannot exceed the lesser of 25 percent of the participant’s compensation or $55,000.
5. SIMPLE Plan (401(k) or IRA)
Maximum annual salary reduction deferral: $12,500 ($15,500 if age 50 or older)Target Benefit Pension Plan Annual additions cannot exceed the lesser of 100 percent of the participant’s compensation or $55,000.
6. Defined Benefit Pension Plan
Benefit provided cannot exceed the lesser of 100 percent of the average of the participant’s highest three consecutive years of compensation or $220,000.
7. Tax-Sheltered Annuity
Maximum annual salary reduction: $18,500 ($24,500 if age 50 or older) Section 457 Plan Maximum annual deferral: $18,500 ($24,500 if age 50 or older)
NOTE: Withdrawals from a qualified plan prior to age 59 1/2 may be subject to a 10 percent early withdrawal penalty, as well as taxation. Make sure that you are taking full advantage of the power of tax deductions and tax-deferred accumulations in your retirement planning. If your employer does not offer a qualified contribution plan, it is even more important that you start saving on your own. There are several options available to you.
According to Vanguard, just 4 percent of savers in their defined contribution plan who earn $50,000 a year max out their 401(k). For those making between $50k and $100k that number jumps to 11 percent of participants. And 32 percent of people making $100,000 or more max out their tax-deferred savings. Those numbers become more startling when you see what it takes to save $1,000,000 in a qualified plan in your lifetime.
Assuming you invest $18,500 per year, you would need to get the following interest rates. A 30-year-old would need to get a rate of return of 2.20 percent, a 40-year-old would need to get 5.54 percent and a 50-year-old would need to get a 14.5 percent return on their investment. While 2.20 percent would be relatively easy to get, the 14.5 percent would be nearly impossible. It goes without saying, but the earlier you start, the better off you will be.
Holly Peterson is the owner of Elite Retirement Strategies and former radio show host. She is a professionally licensed insurance producer specializing in retirement planning and safe money solutions. As a regular seminar speaker, she acts as a catalyst in helping others achieve their financial objectives. Holly serves all of Idaho. You can find her online at eliteretirementstrategies.com. 208-252-4345