Your 2018 Contributions to 401(k)s and IRAs

According to the U.S. Census Bureau, two thirds of American workers don’t put money into a retirement plan at work, either because they aren’t offered one or they choose not to contribute. The result: too many people who’ve worked long and hard have little or no retirement savings to show for it. But it’s not too early to be thinking of putting money into tax-advantaged savings programs in 2018. The more you put it and the earlier you do it, the greater your retirement nest egg will be. Here are the contribution limits for 2018, some of which have been increased by cost of living adjustments.

401(k)s and SIMPLE-IRAs

If your employer offers you the opportunity to put some of your wages into a tax-advantaged retirement plan on a pre-tax basis, grab it. Usually you must commit to your annual contribution by the start of the year, but check with the plan administrator for details on what you need to do. Contribution limits for 2018 are:

• 401(k), 403(b), and 457 plans: $18,500 (up from $18,000 in 2017). The additional contribution limit for those who’ll be at least 50 years old by year- end remains at $6,000, so the total salary reduction limit for 2018 for those 50 and older is $24,500.
• SIMPLE IRAs: The contribution limit for these plans is unchanged at $12,500, or $15,500 for those age 50 and older by the end of the year.

If you can’t make the full contribution, try to contribute at least as much as what will earn you the maximum employer matching contribution. Depending on the plan, this is typically 2% to 6% of compensation, but again check with the plan administrator.

If your employer offers an automatic 401(k) plan, your participation in and contribution to the plan is automatic. However, you can reduce the amount of your contribution for the year or opt out entirely. Usually this action must be taken before the start of the plan year.

Traditional and Roth IRA contributions

The annual contribution limit for both traditional IRAs and Roth IRAs  is unchanged for 2018. The limit is up to $5,500 per taxpayer (or taxable compensation, if less) , with an additional $1,000 limit for those who will be age 50 or older by the end of the year. However, income limits used to determine eligibility in certain situations have increased.

Traditional IRAs for active participants. There’s no income limit for traditional IRA contributions if you don’t participate in a qualified retirement plan such as a 401(k) plan. But if you’re an active participant and your modified adjusted gross income (MAGI) exceeds a specified threshold, the amount you can deduct for traditional IRA contributions is phased out. MAGI is generally the same as adjusted gross income (AGI) but may be higher because certain deductions and exclusions must be added back. For 2018, here are the MAGI phaseout rules:

• Married filing jointly/qualifying widow(er): No phaseout for MAGI up to $101,000 (up from $99,000 in 2017). The deductible limit is phased out if  MAGI is between $101,000 and $121,000.
• Single/head of household: No phaseout for MAGI up to $63,000 (up from $62,000 in 2017). The deductible limit is phased out if MAGI is between $63,000 and $73,000.
• Married filing separately: A partial deduction can be claimed for MAGI between zero and $10,000; this hasn’t changed.
• Taxpayer who is not an active participant but whose spouse is: No phaseout for MAGI up to $189,000 (up from $186,000 in 2017). A partial deduction can be claimed for MAGI between $189,000 and $199,000.

Roth IRAs. Regardless of whether you participate in a qualified retirement plan, there are income limits for contributing to a Roth IRA; all contributions are nondeductible. For 2018, the MAGI limits are:

• Married filing jointly/qualifying widow(er): MAGI up to $189,000 (up from $186,000 in 2017). The contribution limit is phased out for MAGI between $189,000 and $199,000.
• Single/head of household: MAGI up to $120,000 (up from $118,000 in 2017). The contribution limit is phased out if MAGI is between $120,000 and $135,000.
• Married filing separately: The contribution limit is phased out if MAGI is between zero and $10,000; this hasn’t changed.

Retirement saver’s credit

The tax law gives you an incentive to add to a 401(k) or similar plan or contribute to an IRA by offering a retirement saver’s credit. Using the credit allows you to double dip: obtain an exclusion from income for salary contributed to a 401(k)-like plan or a tax deduction for a traditional IRA, plus claim a tax credit if your income is below set limits. The credit is a percentage of modified adjusted gross income (MAGI). For 2018, the limits are:

• Married persons filing jointly: MAGI up to $63,000 (up from $62,000 in 2017). A higher credit percentage applies to lesser amounts of MAGI.
• Heads of households: MAGI up to $47,250 (up from $46,500 in 2017). Again, a higher credit percentage applies to lesser amounts of MAGI.
• Singles: MAGI up to $31,500 (up from $31,000 in 2017). Again, a higher credit percentage applies to lesser amounts of MAGI.

Conclusion

While IRA contributions for 2018 can be made up to the due date of the return (April 15, 2019), the sooner you add your money the longer you have for it to grow on a tax- deferred basis (for traditional IRAs) or tax-free basis (for Roth IRAs if holding period tests are met).