401k, IRA and Roth IRA Limits for 2018

Retirement account limits have changed in 2018! Find out what's changed in order to maximize your savings and reduce your taxes.

. 3 min read. Investing.
Times Square New York

The biggest change in retirement accounts for 2018 is a $500 increase in the amount you can put into a 401k. This raises the amount for all age groups, which is a huge plus.

Year401k
(under 50)
401k
(50 or older)
IRA / Roth IRA
(under 50)
IRA / Roth IRA
(50 or older)
2018$18,500$24,500$5,500$6,500
2017$18,000$24,000$5,500$6,500

Aside from the small 401k increase, all other amounts are staying the same. Keep in mind, these are the limits on the amount you put into the retirement account. If your employer is matching your contributions in some way, that has a different limit — which also increased from $54,000 in 2017 to $55,000 in 2018 (or $60,000 to 61,000 if you’re 50 or older).

About that $55,000…

Chances are you’re not going to be able to hit $55,000 even you tried. There are two possible ways that people are able to hit this:

  • Extremely generous company match
  • After-tax 401k contributions (rarely allowed)

After-tax 401k contributions are a way to contribute to an account that’s effectively a Roth IRA – but with crazy high limits. It works something like this:

  1. You contribute to your (traditional) 401k ($18,500) and your (after-tax) 401k (up to: $55,000-$18,500-your company match).
  2. Money goes into two separate buckets within your account.
  3. When you’re able to take money out, you convert the (after-tax) 401k into a traditional IRA.
  4. Roll over the traditional IRA to a Roth IRA (and pay no taxes!).

This sounds like a lot of work. I’ve never been lucky enough to be at a company which allowed this strategy, but if you’re maxing out your 401k it’s worth checking out. It’s a possible way to save a lot of money in a low-tax way, but most 401k plans don’t allow this. If yours does, it’s worth taking advantage of.

IRA Changes

Not much has changed on the IRA contribution side. There is still a $5,500/$6,000 limit, which is a combined amount amongst all IRAs you have. If you have 2 IRAs, you can only contribute this amount total — not $11,000/$12,000. When you report on your IRA contributions at the end of the year, that would be a serious red flag. Vanguard isn’t checking that you’ve already put money into an IRA at Fidelity – it’s your responsibility to know that and contribute accordingly.

Which Account Should You Use?

Choosing between 401k, IRA, Roth IRA and everything else can be a lot of research. It’s not as hard as it sounds though! There’s a handy chart created by a wonderful Reddit user that I absolutely love.

The order of accounts here is what matters – 401k up to match, IRA/Roth IRA, more 401k, then finally a brokerage investing account. If you don’t have access to a 401k, then you’ll likely jump to a brokerage account much faster. I mentioned on the FIRE Drill Podcast that I worked at some startups that didn’t have a 401k available, which led to a large amount more in brokerage than I otherwise would have.

Roth IRA or IRA?

This is a much harder question to answer. My recommendation isn’t the best possible answer for taxes, but it breaks things into 3 easy tiers:

  • If you’re making under $63,000 ($101,000 married): Traditional IRA and deduct it
  • If you make between $63,000 ($101,000 married) and $120,000 ($189,000 married): Roth IRA
  • If you make above $120,000 ($189,000 married): Traditional IRA and use a backdoor Roth

The takeaway is to use a traditional IRA and deduct it if you can. You get the tax benefit now when you’re in earning years, and that additional amount invested will have that much more time to grow.

Traditional IRA with a Deduction? Or Roth?

Let’s look at an example of using a Roth vs a traditional for people making under $63,000. Say you invested $5,500 in a Traditional IRA and let it grow 30 years at 7%. You’d have $41,867.40.

If you invested $5,500 in a Roth IRA and let it grow 30 years at 7%. You’d have $41,867.40 as well. However, you also would’ve paid taxes on that money. If you’re in a 25% tax bracket, that’s $1,375 paid in addition. To level the playing field, what if for the Traditional IRA example, we also put $1,375 into a brokerage account and invested it as well? Here’s what you’d have:

  • Traditional IRA: $41,867.40, Brokerage: $10,466.85 = $52,334.25
  • Roth IRA: $41,867.40

Wow, so with by using a Traditional IRA over a Roth IRA, we’re getting $1,375 to do with however we want, and an extra 25% growth on our investments. If you’re expecting to be in a lower tax bracket when you retire, getting an extra 25% to invest is a pretty good deal!

How Much Should You Save in 2018?

As much as you can. There’s no right answer to this. It all comes down to when you want to be financially independent. The earlier you want to be FI, the more you should save – it’s that easy.

I’m planning on doing quite a bit of investing in 2018 with money coming in:

  • Maxing out my 401k with $18,500
  • Maxing our Mrs. Minafi’s 401k with $18,500
  • Putting $5,500 into a Roth IRA for me
  • Putting $5,500 into a Roth IRA for Mrs. Minafi
  • Starting a joint brokerage account with Mrs. Minafi at Vanguard to fund with even more

We’ve been putting this last one off due to the odd Q4 we’re having (selling our house, moving, pre-paying for trips in Q1 2018). We’ve been setting aside money for this in our Simple account and will be transferring it over on January 1, 2018. This allows it the most time to grow in the new year (it’s time in the market after all).


What investments are you making in 2018? Which accounts are you utilizing?

15 comments

  1. Awesome article! I recently rolled my 401 from my previous employer into a traditional IRA with plans to convert the assets to my existing Roth IRA over time. I also have a brokerage account.

    From 1/1 to 4/17/18 IRA contributions can go towards either 2017 or 2018 limits.

    1. Thanks Jason! And good catch about the dates for contributions – that slipped my mind.

      I took the hit and converted my IRA to my Roth over time a while back too (but there wasn’t too much in it — maybe $20k). I ended up paying a bit more taxes than I thought I would at the time.

    1. That sounds like it has a lot of promise for sure. My current “business income” is about $10/month, so might be something for later on down the line. I’ll remember that though for when it becomes a possibility — thanks for the tip!

  2. Good article and excellent waterfall. Easy explanation for folks just getting started, showing the progression.

    Looks like you guys are well on your way – congratulations!

    For Mrs. 39 Months and I, we are on the tail end of our savings, with only 30 months to go. We’ve got all debt paid off, have maxed the 401K and Roth IRA for several years, and have found other ways to invest our additional funds. By keeping our expenses down, we hope to be able to put over 70% of our take-home money away for the next 30 months and hit our Independence day on July 4, 2020!

  3. I got really excited because I saw the NYC pic at the top of the post!

    Curious why you recommend a traditional IRA at a lower income over the Roth? Just flies in the face of general advice I’d seen (lower income = Roth). At the end of the day, I guess none of us know what taxes will be like in the future!

    I use all the accounts you listed, max out 401k and I don’t qualify for Roth anymore. My 2018 goal is to figure out the whole backdoor Roth situation. For now, outside of my 401k I’m contributing to my taxable brokerage account.

    1. I was trying to think of something that screams “New Year!” and my association for that is Time Square!

      The Roth vs tIRA math is so tough to generalize. My recommendation there would have a bunch of caveats for sure. The part I left out is around tax rate at time of withdrawal. I was kind of curious about this one, so I went a little overboard with this answer:

      Looking at the two examples from this post:

      • Traditional IRA: $41,867.40, Brokerage: $10,466.85 = $52,334.25
      • Roth IRA: $41,867.40

      What would happen if you were to withdraw both amounts in their entirety in one year? How much would you have in your pocket?

      The Roth IRA is easy since there are no taxes. You’d have $41,867.40.

      The tIRA + brokerage is another story:

      • On tIRA balance of $41,867.40, you would pay (10% of $9,325) + (15% of $28,625) + (25% of $3,917.4) = $6,205.6
      • On the brokerage balance of $10,466.85, you would pay (15% of $10,466.85-$1,375) = $1,363.77

      Of the $52,334.25, you would pay $7,569.37 in taxes and get to keep $44,764.88. Or about 7% extra by using an IRA!

      This math will scale up, but it won’t scale down. If you’re making under $37,950, then you should probably go with a Roth IRA – at least if you plan to withdraw more than $37,950 upon retirement.

      There’s one other situation that’s not mentioned — what if you withdraw less from your tIRA, and instead supplement with a brokerage account or Roth IRA to keep your taxes a little bit lower.

      What’s even better is that if you’re filing jointly, the tax bracket will be even lower! You’d be in the 15% income bracket, so your capital gains tax would be $0, resulting in total taxes of (10% of $18,650) + (15% of $23,217.4) = $5,347.61. Meaning you’d get to keep $46,986.64; 12% higher than using a Roth.

      You could maximize things even more by using more funds from a brokerage or Roth each year and lowering the amount you’re withdrawing from your IRA.

      This is all my best guess based on my limited reading on the topic, but I enjoy the math behind it. 🙂 This is all dependent on getting a tax deduction for the IRA too. If you can’t get that (like in both of our cases), then a backdoor roth makes the most sense.

  4. Adam,
    Thanks for the brake down. I just convert to the BRS system to get the matching contribution. I am contributing 20% to my TSP as of right now because I am paying off some stuff. After than I will be maxing out my TSP. My question is will the govt. contribution count as well towards what I contributed. For example is I put 20% and the govt. put 5% which will equal 25% total contribution, I needed 25% to max my monthly contribution(should I put the 25% of my own contribution). I just do not want to go over the $18,500 at the end of the year. I also planning on maxing out my Roth IRA with Vanguard as well.

    I really do hope this make sense. I wanted to get that extra 5% so I do not have to actually put in the full 25% to max out. P.S I know those are not the correct percentage I am just using it as an example.

    1. Hey Grams! I’m not familiar with BRS (I had to look that one up). For 401ks though, the $18,500 limit is your personal limit. So you can put in $18,500 as your limit. There’s that $55,000 limit I mentioned, which your limit of personal + company. So the government wouldn’t be able to put in more than $36,500 (which is very unlikely).

      I’m not sure if that’s how it works for your BRS, but it is how it will work for a 401k. Hope that helps!

      1. Thanks for your respond.
        That explains a lot and clarify my question. The Blended Retirement System (BRS) works just like the 401k( just call TSP for military).

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