By Brighton Samet, Moneta Tax Planning Consultant
You can contribute more to your retirement accounts in 2019 – and it’s not too late for 2018 contributions.
Many retirement plan dollar limits increased due to cost-of-living inflation adjustments, effective January 1, 2019. It’s also still not too late to make certain retirement plan contributions for 2018.
1. 401(k) and 403(b) Elective Deferrals
For 2019, the limit on elective deferrals to 401(k) and 403(b) plans increased from $18,500 to $19,000. Depending on what your employer offers, this is the combined limit for the employee’s contribution to traditional and Roth accounts.
Because of the tax-deferred advantage, it is typically wise to max out your retirement contribution if your circumstances allow you to do so. If you cannot contribute the maximum, consider increasing your contribution rate by 1% each year. Over time, this will steadily grow the amount you contribute as you work toward those maximums. Also, some plans have an automatic contribution increase feature, which will ensure you save more each year. At a minimum, you should consider maximizing available employer match contributions.
For individuals aged 50 or older, the additional “catch-up” contribution limit of $6,000 remains the same.
2. Defined Contribution Plans in General
Defined contribution plans are retirement plans in which the employee and/or employer contribute to the employee’s individual account. The value of the account will vary based on how the assets are invested, and the final retirement benefit is not guaranteed. 401(k) and 403(b) plans are examples of defined contribution plans.
The overall limit for contributions to defined contribution plans increased from $55,000 to $56,000 in 2019.
This is the limit of all contributions, whether from an employer (such as the employer match or profit sharing) or employee (such as elective deferrals and after-tax contributions). However, a “catch-up” contribution is not subject to this limit.
3. SEP IRA Plans
A SEP is a Simplified Employee Pension Plan. The employer contributes on a tax-favored basis to individual retirement accounts owned by its employees.
For a SEP IRA, the employer’s contribution for each employee cannot exceed the lesser of:
- 25% of compensation; or
- $56,000 for 2019
For 2019, employers may only make contributions to an eligible employee based on the employee’s first $280,000 of compensation. If you are self-employed, there are special rules that apply when figuring the maximum deductible contribution.
4. SIMPLE IRA Plans
SIMPLE IRA is an acronym for Savings Incentive Match Plan for employees of small employers. For employers with fewer than 100 employees, these plans allow both employee and employer contributions, but have fewer administrative burdens than a 401(k) plan.
The maximum amount an employee may elect to defer to a SIMPLE plan increased from $12,500 to $13,000 in 2019.
For individuals aged 50 or older, the additional “catch-up” contribution limit of $3,000 remains the same.
5. Traditional and Roth IRAs
Traditional IRAs grow tax-deferred. Depending on whether any nondeductible contributions were made, traditional IRA distributions will be either entirely or partially taxable. Roth IRA contributions are not deductible. If you satisfy the requirements, Roth IRA distributions will be tax-free.
The annual contribution limit increased from $5,500 to $6,000 in 2019.
If you file a joint tax return and have enough taxable compensation, you and your spouse can both contribute to your own separate IRAs (no matter who earned the income).
If you (or your spouse) are covered by a retirement plan at work, there may be income limitations to deducting your traditional IRA contributions. There are also income limits to making Roth IRA contributions. However, there are no income limits for nondeductible traditional IRA contributions.
For individuals aged 50 or older, the additional “catch-up” contribution limit of $1,000 remains the same.
Planning idea: If your children or grandchildren have earned income, funding or helping them fund a Roth IRA may be an option. With many years to grow tax free, these early contributions could become extremely valuable over time.
It is Not Too Late to Make 2018 Retirement Contributions
For traditional and Roth IRAs, you have until the tax return filing deadline (not including extensions) to make your contributions. For example, you can make 2018 IRA contributions until April 15, 2019.
For SEP IRAs, the employer must deposit the contributions by the due date (including extensions) for filing its federal income tax return in order to deduct the contributions on that return. For most self-employed individuals, this will be April 15, 2019 (plus six months with extension), the same as their personal tax return (some business returns may have other due dates). So self-employed taxpayers may be able to get additional time to fund 2018 retirement contributions by requesting an extension to file (the employer must request an extension to get additional time past the original tax return due date).
The rules related to retirement plan contribution limits can be complex, especially if you have multiple types of accounts. You should consult with an appropriately credentialed professional before making any financial or tax planning related decision.