What is the maximum IRA contribution for 2017? If you’re asking this question it means one of two things: 1) You are looking for a way to save money in taxes, or 2) You want to ensure you are doing everything you can to guarantee a secure retirement.
Maximum IRA Contribution
The maximum Individual Retirement Account (IRA) contribution for 2017 is $5,500, or $6,500 if you are 50 years or older. In other words, you cannot contribute more than that amount for the calendar year 2017. But, you can choose how you wish to contribute. For example, you can either contribute over time, say once per month. Or, all at once at the end of the year.
If your goal is to send less tax money to the IRS, you can do this by contributing to a traditional IRA. After determining their tax liability for the year is high, many people choose this option in order to save some cash that would otherwise go to the government. Keep in mind that a Roth IRA does not have the same tax-deferred advantages. So if you are opening an IRA for the sole purpose of reducing your tax liability, be sure you select a traditional IRA.
To further illustrate, if you find at the end of the year that you owe a significant amount of tax and have not contributed to an IRA, the amount you contribute will be reduced from your taxable income. For example, if you make $100,000 and contribute $5,500 to an IRA, you will pay income tax on $94,500, as opposed to $100,000.
If you fall into the latter group, those wanting to ensure a secure retirement, maxing out your retirement account contribution is an exceptional way to do this. Look at it this way, if you contribute $5,500/year to a traditional IRA from age 30 to 65, you will have just shy of $900,000 when you retire, assuming a modest return of 7%.
Maximum 401k Contribution
If you want to build an even more sizable nest egg, consider maxing out your 401(k), as well. For calendar year 2017, the maximum amount you can contribute in your 401(k) is $18,000. With this option alone, you will not only be reducing your taxable income by $18,000, but also, over 35 years with a 7% return, be looking at $2.8 million dollars at age 65.
Plan For Your Retirement
The obvious next question is how much do you need to retire comfortably? Start with your current salary and subtract expenses you will no longer have in retirement (possibly mortgage, life insurance, etc.) Then, add in expenses you will have in retirement, such as assisted living (there’s no way to know for sure), long-term care insurance, etc. Many financial experts believe that 80% of your current income is a safe bet, but the number really depends on your specific plans for retirement.
For simplicity, let’s say you want to have $60,000/year in retirement. One way to get there is to have $1,000,000 (nest-egg) saved in a retirement account that is earning 8%-9% annually. You can live off your return each year without withdrawing from your principal nest-egg, but, keep in mind, you will need to adjust for inflation (on average, 2–3%/year) and changes in the market, as well as how many years you expect to live off your retirement savings.
Whether you want to save money in taxes or guarantee retirement security, these are all important factors to acknowledge when considering IRA contribution.
Holly is an award winning financial coach, entrepreneur, and speaker. She is a Certified Financial Health Counselor, Certified Student Loan Counselor, and Accredited Financial Counselor ®. Her unique background in business, corporate America, and real estate give her a broad perspective to help her clients create wealth, stop living paycheck to paycheck, and eliminate debt.
Holly began teaching personal finance in 2006 to young adults as a service project with Rotary International. Her workshops were so popular she decided to teach personal finance full-time so she could help more people. She created The Financial Impact System, a step by step guide to master your money, streamline spending, protect your money, and create multiple streams of income.
Holly is originally from Boulder, Colorado. She received the prestigious “Rotarian of the Year” award in 2007/08 for her work in financial literacy. Holly served as Treasurer of the Erie Rotary Club from 2006–2009. She has a B.A. in International Business & Japanese from the University of Colorado. She now resides in Denver, Colorado. Holly also plays competitive beach volleyball year-round, practices yoga, and loves to hike with her two dogs.