Recently, the Internal Revenue Service (IRS) announced an increase for the maximum amount taxpayers can contribute to their retirement and pension accounts, such as 401(k)s, 403(b)s, most 457 plans and the IRS’s Thrift Savings Plan.
Taxpayers can decide what percentage of their income they want to automatically transfer into a pension plan such as those named above, before taxes. A majority of Americans choose somewhere between 3 and 10 percent, depending on whether or not their employer offers a matching contribution. However, if at any time during the year they hit the annual maximum—currently $18,000 per year for 2017—they must cease the transfers until a new year begins.
Here are highlights from the IRS’s recent announcement regarding new maximum limits for 2018:
401(k), 403(b) and 457 Plans:
Beginning in 2018, the maximum will go up $500 per year from the current $18,000 to $18,500. In addition, if your 50th birthday falls at any point during the 2018, you can make additional “catchup” contributions of up to another $6,000, for a total of $24,500 for the year.
Self-Employed or Solo 401(k) Plans:
People who are self-employed can still save for retirement—most major brokerage firms can set up a self-funded, individual 401(k) plan for you. Contribution limits for these types of accounts will also increase in 2018, based on the person’s net income profit for the year. For example, if you netted $80,000 in self-employed income for the year, your maximum in 2018 will be $32,870, or add another $6,000 to that if you celebrate your 50th birthday at any point during the year.
Increases to Income Ranges for Deductible IRA Contributions
In addition, IRS officials announced that the income ranges that determine whether a taxpayer is eligible to deduct contributions to Individual Retirement Arrangements (IRAs) and Roth IRAs, or to claim the IRS’s Saver’s Credit, are also increasing in 2018. A breakdown of these new limits is available on the IRS website.
For those who are not covered by employer-offered pension plans, and instead opt to contribute to their own IRA—or, if someone wants to contribute to a personal IRA in addition to their employer-offered plan—contributions to that IRA may be eligible to be deducted from annual taxes owed. Certain criteria apply.
Single taxpayers who become covered by an employer-offered plan at some point during the year may have their eligible deductions “phased out” if their annual income falls into a certain range. The IRS announced the ranges for most phase-outs, depending on the person’s filing status, will increase by $1,000 per year as well. For example, a single taxpayer’s range will increase from $62,000-72,000 to $63,000-73,000. More details and various breakdowns are available on the IRS website.
Income Limits for Saver’s Credit Eligibility
The income limits for qualification for the IRS’s Saver’s Credit (also known as the Retirement Savings Contributions Credit) also increased slightly—between $500 to $1,000 per year–based on various criteria. A complete breakdown can be found on the IRS website.
New Limits for Contributions to Healthcare Spending Accounts
The IRS also announced new contribution limits for Healthcare Spending Accounts (HSAs). For single taxpayers setting aside pre-tax money for yearly medical expenses, the maximum will increase $50 from $3,400 to $3,450 in 2018. Maximum limits for qualifying family plans will increase $150, to $6,900. Those age 55 and older can add another $1,000 to those single or family limits.
What Remains Unchanged?
Some limits will remain unchanged for 2018. For IRAs and Thrift Savings Plan contributors, contribution limits as well as “catchup” contribution limits for employees age 50 and older will not change for 2018, according to the IRS’s announcement.
Confused by any of this? Let our experts at Wendroff & Associates help you! Call us anytime for a consultation on matters like how retirement savings affects your taxes, accounting and more.