How to Maximize 401(k) Limits and Savings Strategies

Your employees will be able to save more money in their 401(k) retirement accounts this year. The big question, though, is should they save the annual maximum?

New Contribution Cap

For employer match accounts, the Internal Revenue Service raised the annual contribution cap for 401(k) and defined contribution retirement accounts from $18,500 to $19,000. Defined contribution retirement accounts include 403(b) plans, most 457 plans, and the federal government’s Thrift Savings Plans. The catch-up limit on defined contribution plans for employees who are 50 or older remains unchanged at $6,000. That means employees age 50 and older can save as much as $25,000 in their 401(k) plan each year.

An employee can defer $19,000 of pretax earnings. There also is a $56,000 limit (up from $55,000) to how much employee and employer contributions and profit-sharing contributions can be made to defined contribution plans.

Families who qualify can claim a Saver’s Credit on their tax return for the amount they save each year. The maximum amount that can be saved annually was increased $1,000 for married couples to $64,000; up $750 to $48,000 for heads of households; and up $500 to $32,000 for singles and single filers. The credit was formerly named the Retirement Savings Contributions Credit. It gives a special tax break to low- and moderate-income taxpayers who are saving for retirement.

To Max Out or to Not Max Out

Many retirement experts advise employees to “max out” their 401(k) contributions. Maxing out means contributing the maximum amount a person is allowed to save annually. This maximum amount does not include employer matching contributions, allocations of forfeitures or any mandatory contributions.

The question, then, is whether your employees should save that much. For example, assume an employee wants to contribute the 2018 maximum to their 401(k) for 30 years and they earned 7 percent returns on their investments. They would have a $1.75 million nest egg — not including matching contributions. While anyone might be thrilled to have that much money, it’s a lot to save each year and many people don’t need that much.

On the other hand, a 40-year-old with no savings might want to max out their 401(k) contributions.

For most people, contributing 10 percent of their salary to a company’s 401(k) or other retirement savings probably is enough if sustained throughout their career.

A study by the Center for Financial Security at the University of Wisconsin-Madison found that employees appreciate it when employers offer financial education as a way to make better financial decisions. According to the study, participants with access to an online financial program in the workplace increased their contributions to retirement accounts by an average of 40 percent.

Two common ways employers can provide financial assistance include offering:

• Managed accounts overseen by professionals or by an automated investment platform. According to The Wall Street Journal, managed accounts don’t always mean better returns and may not be worth the expense.


• Target-dated funds — passively managed portfolios targeted to a certain year (usually the employee’s retirement date). As the employee ages, assets are shifted from risky to more conservative.