Tax reform is always a hot topic and the recent legislation makes far-reaching reforms on individual and business taxes, but did you know that it also affects retirement accounts?
Retirement plan contribution limits are adjusted for inflation, but with inflation remaining low, many limits remain unchanged for 2018. However, there is some good news for taxpayers who are already maxing out their contributions. The 401(k) limit has gone up by $500. The only other limit that has increased from the 2017 level is for contributions to defined contribution plans, which has gone up by $1,000. Defined contribution plans are better known as employer-based 401(k)s, in which both the employer and the employee contributions.
Other retirement planning accounts such as IRAs and SIMPLEs remain the same. Use this chart to determine which retirement accounts have increased in 2018:
|Type of limit||2018 limit|
|Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans||$18,500|
|Contributions to defined contribution plans||$55,000|
|Contributions to SIMPLEs||$12,500|
|Contributions to IRAs||$5,500|
|Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans||$6,000|
|Catch-up contributions to SIMPLEs||$3,000|
|Catch-up contributions to IRAs||$1,000|
What Does This Mean For Your Retirement Plan?
The obvious upshot is that you have the opportunity to contribute more to your 401(k), 403(b), 477(b)(2), and 457(c)(1) plans. If you’re not already maxing out your contributions to other plans, you still have an opportunity to save more in 2018. For example, if you turn age 50 in 2018, you can begin to take advantage of catch-up contributions. The term “catch-up contribution” refers to a new option for individuals over 50 to increase 401(k) contributions as retirement draws near.
Higher-income taxpayers will be relieved to learn that some limits on their retirement plan contributions that had been discussed as part of tax reform didn’t make it into the final legislation.
There are still additional factors that may affect how much you’re allowed to contribute (or how much your employer can contribute on your behalf). For example, income-based limits may reduce or eliminate your ability to make Roth IRA contributions or to make deductible traditional IRA contributions.
Consult a Tax Advisor
Navigating retirement plans in the midst of constant tax reforms can be tough, but it’s important to stay the course and continue to save for retirement. These changes allow for higher contributions and we encourage you to take advantage. If you are unsure of how these changes might affect your retirement accounts or how much you should be contributing, a professional tax advisor can help. Contact Steward Ingram & Cooper PLLC at (919) 872-0866.