<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=1676018699383895&amp;ev=PageView&amp;noscript=1">

Insights

How You Can Maximize Changes In Retirement Contribution Limits

Posted by GuidedChoice on Dec 28, 2018 1:42:42 PM
<span id=How You Can Maximize Changes In Retirement Contribution Limits">

As 2018 is ending, the IRS has released its tax laws for 2019. While there aren't nearly as many changes as there were for 2018, which reflected the sweeping tax law revisions in the Tax Cut and Jobs Act of 2017, there some changes will affect contributions to your retirement funds. The IRS also has changed how it calculates inflation.

These changes will not affect the tax returns you are about to file for 2018. Instead, they will be for tax returns you will file in 2020 for the 2019 tax year. But there are still a few things that you can do before filing your taxes this year, including maxing out your contributions to your retirement accounts or opening an Individual Retirement Account (IRA).

Changes in retirement contribution limits

The biggest change for 2019 is an increase in the post-tax amount you can contribute to a Roth or a traditional IRA. Through 2018, you could contribute up to $5,500. That amount will increase to $6,000.

However, the catch-up contribution amount for those approaching retirement amount remains at $1,000. If you are over the age of 50, you can contribute a total of $7,000 to a Roth or an IRA.

There also is an increase in 401(k), 403(b) and 457(b) contribution limits in 2019. The limit for any pre-tax retirement account has increased to $19,000. The catch-up contribution limit remains at $6,000. If you are over the age of 50, you can contribute a total of $25,000 to a tax-deferred retirement plan in 2019.

The maximum contribution for defined contribution plans, such as those for self-employed persons with a solo 401(k) plan, has increased to $56,000.

It's important to contribute up to the allowable limit on all available accounts, if possible. All contributions, which earn compound interest, will provide greater financial stability when you retire. Also, retirement contributions are a way to reduce tax liability.

2019 tax brackets

Another change for 2019 is that the IRS has adjusted tax brackets for inflation. These are the new tax brackets from the official IRS website for 2019:

Filing as Single 2019 Tax Brackets

Income Tax Bracket

$0 - $9,700 10%

$9,700 - $39,475 12%

$39,475 - $84,200 22%

$84,200 - $160,725 24%

$160,725 - $204,100 32%

$204,100 - $510,300 35%

$510,300+ 37%

Filing as Married Jointly 2019 Tax Brackets

Income Tax Bracket

$0 - $19,400 10%

$19,400 - $78,950 12%

$78,950 - $168,400 22%

$168,400 - $321,450 24%

$321,450 - $408,200 32%

$408,200 - $612,350 35%

$612,350+ 37%

Filing as Head of Household 2019 Tax Brackets

Income Tax Bracket

$0 - $13,850 10%

$13,850 - $52,850 12%

$52,850 - $84,200 22%

$84,200 - $160,700 24%

$160,700 - $204,100 32%

$204,100 - $510,300 35%

$510,300+ 37%

Filing as Married Separately 2019 Tax Brackets

Income Tax Bracket

$0 - $9,700 10%

$9,700 - $39,475 12%

$39,475 - $84,200 22%

$84,200 - $160,725 24%

$160,725 - $204,100 32%

$204,100 - $510,300 35%

$510,300+ 37%

Change in calculation of inflation

Another thing to know is that the IRS has changed how it calculates inflation. Instead of following the standard inflation that your pay raises will follow, tax inflation will follow a slower increasing "chained" inflation. The impact is you will increase in tax brackets faster than you increase in wages, causing you to pay more taxes over the years.

Other 2019 changes include capital gains and qualified dividends receiving an inflation increase, and Social Security benefits will include a cost-of-living-allotment (COLA) increase of 2.8 percent.

Maximizing 2018 contributions

One way to lower tax liability is to maximize contributions to IRAs and pre-tax retirement savings accounts. Money put into retirement savings reduces your overall taxable income.

The 2018 tax year is over but there are still actions you can take that will lower your tax liability while increasing your retirement savings. Both IRAs and 401(k) accounts can receive payments until you file your 2018 tax return. The deadlines include any extensions, so April or October 2019 will be the last time you can make payments into your retirement savings accounts for the 2018 tax year.

If you have an account with an employer-sponsored plan, check with your plan sponsor to find out when they stop accepting payments into your account. Some plans based on payroll deductions stop accepting payments at year-end. However, verify if you can make deposits up to your limit until you file your taxes.

Remember, in 2018 you can contribute $18,500 to a 401(k) plan with a $6,000 catch-up contribution if you are over the age of 50.

Another option is to contribute the maximum amount to a Roth or traditional IRA. The 2018 IRA limit is $5,500 with a catch-up contribution of $1,000 for anyone over the age of 50. Check with your adviser to see if you can contribute more money to reach the allowable limit. Be careful with existing IRAs, as any amount you have contributed beyond the limit will be taxed at 6 percent unless you remove the funds.

It's not too late to open an IRA for the 2018 tax year

Although the 2018 tax year ends on December 31, you can still open a new IRA account until you file your 2018 taxes. This is your best option if your only savings for retirement is in a 401(k) account, or if you don't have an employer-sponsored retirement plan. You can open and contribute to as many traditional or Roth IRAs as you want, but your total contributions to all the accounts cannot exceed the annual allowable limit. So, if you have five accounts, you can only contribute a total of $5,500 to them in 2018, plus catch-up contributions if you are over teh age of 50.

While most of the new tax laws for 2019 affect very little other than adjusting for inflation, some new benefits can help you increase your savings for retirement. Contributing up to the allowable limit for both pre-tax retirement plans and IRAs will increase the health of your retirement savings account while decreasing your tax liability. Opening an IRA account will provide another avenue to increase retirement health while minimizing what you owe in taxes.

Ultimately, reducing taxes gives you more money now and contributing to your retirement gives you more money later.

Topics: 2019 contributions, 401k contributions 2019, Tax changes 2019, contribution changes 2019, Maximize retirement contribution limits

Subscribe Here!

Recent Posts