IRS Announces 2018 Retirement Account Contribution Limits
The IRS has announced the 2018 inflation-indexed increases for retirement accounts contribution limits and other retirement figures. Workplace retirement plans mostly saw an increase in their limits, while individual retirement accounts saw little change.
Workplace Retirement Plans
- $18,500 max employee contribution: 401(k), 403(b), and most 457 plans
- $55,000 for the total contribution between the employee and employer
- $6,000 additional catch-up contribution limit for those over 50
- $12,500 contribution limit for SIMPLE accounts (unchanged)
401(k) Plans
Workplace plans saw a bump of $500, allowing workers to now contribute up to $18,500 per year to their workplace retirement plan and take a tax deduction for it. The most common plan is the 401(k) plan, which sometimes offers a matching component from the company. When combining the amount the employee and employer contributes, a maximum of $55,000 can be contributed for those under 50, and $61,000 for those over 50.
403(b) and 457 Plans
Non-profits and government agencies offer their own version of the 401(k) called the 403(b). And some organizations also offer a 457 plan. The 457 plan is an unusual plan in that you can contribute to both it and another workplace retirement account. If you have access to a 403(b) and a 457 plan, you may have the ability to contribute a maximum of $37,000 to your tax-deductible retirement accounts. $18,500 in the 403(b) and $18,500 in the 457 plan.
SIMPLE Retirement Accounts
Those who work for small businesses may have an alternative to the 401(k), such as a SIMPLE account. These accounts are easier for companies to manage, but their contribution limits are lower. SIMPLE accounts and SEPs both saw no change in their IRS limits.
IRA Plans
- $5,500 per person
- $1,000 additional catch-up contribution limit for those over 50
Traditional IRA plans allow you to take a tax deduction for the contributions you make to your retirement funds, thereby lowering your taxable income and saving on taxes. Unlike workplace plans, you can set up an IRA on your own. The maximum contribution to an IRA remained unchanged at $5,500 for 2018.
Traditional IRA Phase-Out Limit
- $63,000 to $73,000 Single taxpayers
- $101,000 to $121,000 Married taxpayers filing jointly
- $189,000 to $199,000 Married taxpayers where one spouse has a workplace plan and the other doesn't
While the contribution cap for IRAs didn't increase, the income phaseout limits did increase by a few thousand dollars, offering some the ability to contribute a little more to the deductible IRA. If you have access to a deductible workplace retirement account, you may not be able to take a second deduction for the traditional IRA. (You can, however, potentially contribute to the Roth IRA discussed later.)
For lower-income earners, you have the ability to take a deduction for both a workplace retirement account and the IRA. As you income increases, the ability to deduct both begins to phase out. You'll start losing the ability to deduct your IRA contributions at the beginning of the range above, and when your income reaches the top of the range you will no longer be able to contribute to an IRA and take a tax deduction.
Roth IRA Phase-Out Limit
- $120,000 to $135,000 Single taxpayers and head of households
- $189,000 to $199,000 Married taxpayers filing jointly
- $0 to $10,000 Married filing separately (not a typo, the IRS doesn't like married filing separately)
The Roth IRA option allows you to contribute to a retirement account without getting a tax deduction today. The upside is you don't pay taxes on the money when you retire. Because the government is deferring it's tax collection, the Roth option is designed to phase out as your income increases. You'll begin losing the ability to contribute to a Roth IRA at the beginning of each income phase-out range. When you hit the top of the income range, you'll completely lose the ability to contribute to a Roth directly.
Saver's Credit
- $63,000 income limit for married couples filing jointly
- $47,250 income limit for head of household
- $31,500 income limit for singles and married filing individual returns
The Saver's Credit saw a $500 to $1,000 increase in the income limits before losing the credit. The Saver's Credit offers a refundable tax credit for low-income and moderate income families who actively contribute to retirement savings. If you are under the above income limit for your filing status, saving for retirement offers a double tax refund benefit for your family, along with greater retirement security for yourself.
Other Key Limit Increases
Although the above are the most common retirement changes affecting Americans, a few other items impact for high-income employees. These limits are summarized below, but aren't discussed in detail. They are important for financial advisers, tax preparers, and Human Resources professionals.
- $275,000 annual compensation limit (up $5,000)
- $175,000 for the definition of key employee in top-heavy plans (unchanged)
- $120,000 for the definition of highly compensated employee (unchanged)
Joshua Escalante Troesh is a tenured professor of Business at El Camino College and the founder of Purposeful Finance. His career includes having been a VP at a financial institution leading up to 2008, and involved with technology and internet stock research leading up to 2000. He can be reached for comment at info@purposefulfinance.org