Lost amid the uproar following recent news reports that GOP lawmakers are considering capping pretax 401(k) contributions at $2,400 annually -- compared with $18,000 currently -- was some good news from the IRS, of all places. The tax agency has announced new, higher contribution limits in 2018 for various retirement savings accounts.
Individuals who participate in a 401(k) or other similar type of retirement plan need to know these new limits as they begin to think about their cash flow and financial planning for 2018.
Raising limits on contributions to 401(k), 403(b) and 457 plans
The annual limit on contributions for 2018 is $18,500, up from the current limit of $18,000. And if you're 50 or older at any time during the year (even if your 50th birthday falls on Dec. 31), you can also make additional catch-up contributions into these tax-advantaged savings plans and accounts of an additional $6,000, for a total annual contribution of $24,500.
Changes for self-employed 401(k) plans, or solo 401(k)s
The self-employed can also set up and fund their own 401(k) profit-sharing plan, which allows for the same type of contributions mentioned above. Using this type of plan, which is easily set up at any major brokerage firm, you can also make an additional contribution that's a percentage of net profit (this is the profit-sharing part of the plan).
For an individual who declares about $80,000 net profit from self-employment, the total pretax amount he or she can contribute is about $32,870 in 2018. If you're 50 or older, you can contribute about $38,870. For self-employed individuals who are 50 or older and make a profit of $190,000 or more in 2018, the maximum annual pretax contribution is $59,000.
New income levels for IRA contributions
The limit for contributions to IRAs for those under age 50 who have earned income from wage earnings remains unchanged in 2018 at $5,500. This limit applies to any type of IRA in 2018. People 50 and older in 2018 can make an additional catch-up contribution of $1,000, for a total annual IRA contribution of $6,500.
However, the IRS did increase the income levels used for determining eligibility to make deductible contributions to traditional IRAs, contribute to Roth IRAs and even to claim the Savers Tax Credit.
Single taxpayers who are eligible to participate in a workplace retirement plan are also eligible to make a tax-deductible contribution to an IRA if their adjusted gross income is below $63,000 ($101,000 for marrieds) in 2018. This is up from $62,000 (single) and $99,000 (married) in 2017. This deduction is phased out when AGI falls in the range of $63,000 to $73,000 (singles) and $101,000 to $121,000 (marrieds).
The income range for making contributions to a Roth type IRA in 2018 is $120,000 to $135,00 (singles and head of household) and $189,000 to $199,000 (marrieds).
In 2018, the income limit for the savers tax credit (also called the "retirement savings contributions tax credit"), which is a tax credit for low- to middle-income workers who contribute to a retirement plan or IRA, is $63,000 for married workers (up from $62,000), $47,250 for head of household and $31,500 for single filers (up from $31,000).
New contribution limits for health savings accounts, or HSAs
The 2018 annual contribution limit that individuals with single medical coverage can contribute to a health saving account is $3,450, an increase of $50 from 2017. The annual HSA contribution limit is $6,900 for those covered under qualifying family medical plans (up from $6,750 in 2017). But if you're 55 or older in 2018, you can contribute an additional $1,000, or total of $4,450 to an HSA for singles and $7,900 for families per year.
If you're enrolled in a high-deductible health plan, you really should take advantage of this special savings opportunity. Make it a point to set aside pretax money into an HSA because it grows tax-deferred and can be withdrawn tax-free in retirement when used to reimburse yourself for your out-of-pocket qualified medical expenses.
Planning for 2018
With America already facing a retirement crisis, it's clear that Washington should do more to help workers save for their golden years. Maybe that's why reports over the weekend in The New York Times and The Wall Street Journal that some congressional Republican leaders were proposing to limit the amount Americans can save before taxes sparked so much criticism on Twitter and other outlets.
That prompted President Donald Trump to weigh in on Monday, vowing via Twitter that there will be "NO change to your 401(k)" and praising the current limits.
For now, at least, the major new number for savers to keep in mind for next year's 401(k) contributions will be $18,500 ($24,500 for savers over 50).
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