What is an IRS Deferral Limit?

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If you contribute to a 401(k) or other similar defined contribution programs, you should know what a deferral (or contribution) limit is.  It is the limit set by the IRS that you can contribute without having to pay income tax for it.  This amount may be changed from year to year.  This year, the elective deferral or contribution limit for those who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan has been increased to $18,000 from $17,500 in 2014.  The catch-up contribution limit for those who are 50 and over also increased from $5,500 to $6,000.

A recent survey by the Fifth Third Bank shows 90% of Americans do not know how much the IRS Deferral Limit is.  If you set your contribution amount to match the IRS Deferral Limit, the savings could amount to a lot over the long term.  According to the IRS, even saving just $500 more per year can result in an extra $110,000 return over a 40-year time frame.

The survey also covered other aspects of financial knowledge and practice.  For example, although nearly 60% of those surveyed feel they are financially savvy, yet 44% of Americans are living paycheck to paycheck.  Less than half of Millennials know what a credit score measures, while 60% of respondents regardless of age do not have enough savings to pay bills for six months in the case of an unexpected loss of income.

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