Workers will be able to contribute $500 more to 401(k) plans in 2018. The income limits to qualify for tax breaks by participating in traditional and Roth IRAs and claim the saver’s credit will also increase slightly. Here’s a look at the 401(k) and IRA changes coming next year.
[Read: Social Security Changes Coming in 2018.]
Higher 401(k) contribution limit. The contribution limit for 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan will increase by $500 to $18,500 in 2018. “Take advantage of the additional pre-tax savings and future tax-deferred growth,” says Patrick Rush, a certified financial planner and chief executive officer of Triad Financial Advisors in Greensboro, North Carolina. “If an employee is paid biweekly, that’s equivalent to about $20 extra per pay period. You probably won’t even notice less dollars in your paycheck, but those additional dollars can compound nicely throughout a working career.” The catch-up contribution limit for employees age 50 and over will remain unchanged at $6,000.
Increased IRA income limits. If you or your spouse has access to a workplace retirement plan such as a 401(k), you may not be able to additionally make a tax-deductible contribution to an IRA if you earn too much. The IRA tax deduction is phased out for those who earn more than $63,000 ($101,000 for couples) in 2018, $1,000 more per person than last year. And 401(k) participants who earn more than $73,000 ($121,000 for couples) cannot deduct an IRA contribution on their tax return. If only one member of the married couple has access to a workplace retirement account, the tax deduction is phased out if the couple’s income is between $189,000 and $199,000. Those who don’t have access to a 401(k) or similar type of workplace retirement account are eligible to make tax deductible contributions to an IRA regardless of their income level. The IRA contribution limit is unchanged at $5,500, with an additional $1,000 catch-up contribution allowed for those age 50 and over.
[Read: How Super Savers Max Out Their Retirement Accounts.]
Bigger Roth IRA income limits. When you contribute to an after-tax Roth IRA you set yourself up for tax-free investment growth and tax-free withdrawals in retirement. Individuals who earn less than $135,000 ($199,000 for couples) are eligible to make Roth IRA contributions in 2018, and Roth IRA eligibility is phased out for those with incomes above $120,000 ($189,000 for couples). However, some people are able to get around these income limits by converting traditional IRA savings to a Roth and paying the resulting tax bill.
Relaxed saver’s credit income limit. Workers can earn $500 more and still qualify for the retirement savings contributions credit. Retirement savers who earn up to $31,500 as an individual, $47,250 as a head of household or $63,000 as part of a married couple are eligible for this tax credit worth between 10 and 50 percent of retirement account contributions up to $2,000 for individuals and $4,000 for couples. The biggest credits go to retirement savers with the lowest incomes. The saver’s credit can be claimed in addition to the tax deduction for saving in a traditional 401(k) or IRA.
No more myRA. The U.S. Department of the Treasury discontinued the myRA program in 2017. New deposits will no longer be accepted beginning December 4, 2017. Savers who want to continue to enjoy the tax benefits the myRA provided will need to roll over their balance to a Roth IRA. “One of the attractions to myRA is there were no fees and the minimum requirements were very low,” says Ted Beck, president and CEO of the National Endowment for Financial Education. “So with a new account you will want to pay particular attention to minimum requirements and fees.”
[Read: How to Get a Good 401(k) Match.]
Emergency withdrawals allowed. Recent hurricane survivors are eligible to take hardship distributions from 401(k) plans, 403(b)s and 457(b) plans in order to pay for storm-related expenses until Jan. 31, 2018. The usual six-month ban on new contributions to 401(k)s and 403(b)s will not apply to distributions for storm costs, but income tax and the early withdrawal penalty will continue to be due. “Hardship withdrawals and loans from retirement funds are always a bad idea, in my view, unless it is a real emergency,” says Vid Ponnapalli, a certified financial planner for Unique Financial Advisors in Holmdel, New Jersey. “The reasons are obvious: missing out on investment growth for their important retirement goal, tax consequences and potential penalties for early withdrawal.”
401(k) participants will also be allowed to borrow up to 50 percent of their vested account balance up to $50,000 for storm expenses, but could be charged fees for the loan. “If they have to use their retirement funds to recover from the losses, I suggest a 401(k) loan as opposed to a hardship withdrawal,” Ponnapalli says. “While a loan would still cause them to pay interest and lose on the investment growth, it would at least save them from penalties and tax consequences.” Those who live outside the disaster area are eligible to use loans and hardship distributions to assist a son, daughter, parent, grandparent or dependent who lives or works in the disaster area.
Emily Brandon is the author of “Pensionless: The 10-Step Solution for a Stress-Free Retirement.”
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New 401(k) and IRA Rules for 2018 originally appeared on usnews.com
