Good News for 401(k) and IRA Investors in 2018 Contribution Limit Changes

It’s time to take action and update your 2018 401k and IRA savings accordingly

Recently, the Internal Revenue Service (IRS) announced changes to annual limits for contributions to 401(k), IRA and other qualified retirement plans for 2018. There was good news for 401(k) participants on contribution limits and the tax deductibility of IRA contributions.

Contribution Limits: What’s Changing? What’s Not?

For 401(k) participants, the annual contribution limit increases to $18,500 (previously $18,000) for 2018—a small jump but any increase can help participants save more income on a tax-deferred basis for retirement.

The catch-up contribution limit for participants age 50 and older is $6,000 for 2018, unchanged from the prior year. That means the over 50 workers participating in a 401(k) can save up to $24,500 on a tax-deferred basis next year.

There are no changes for tax-deductible IRA contribution limits. For the 2018 tax year, individual taxpayers can deduct $5,500 in IRA contributions. The $1,000 catch-up contribution limit, which also applied to individuals age 50 and older, also is not changing for 2018.

The table below summarizes this year’s and next year’s limits for some of the more popular qualified retirement plans.

Higher Phase-Out Limits for Tax-Deductible IRA Contributions

There is some good news for IRA investors, especially those who are also covered by a workplace retirement plan: the income phase-out limits for the tax-deductibility for IRA contributions are going up. These higher phase-out limits can help more individuals and married couples lower their tax liability for next year.

The phase-out restricts how much taxpayers can deduct for IRA contributions in a year if they or their spouses also participate in a 401(k) or other workplace retirement plan. The phase-out is determined by income, or more precisely by modified adjusted gross income (AGI), as follows:

For single taxpayers who also participate in a workplace retirement plan, the phase-out range for 2018 is $63,000 to $73,000 for modified AGI. That’s $1,000 higher than the prior year.

For married taxpayers filing joint returns, if one spouse makes IRA contributions and is also covered by a workplace retirement plan, the phase-out range is $101,000 to $121,000 for modified AGI. That’s $2,000 higher than the prior year.

Also for married couples, in the case where one spouse is covered by a workplace retirement plan but the other spouse isn’t, the income phase-out range is modified AGI of $189,000 to $199,000. That’s a $3,000 increase from the prior year.

Roth Contributions: Higher MAGI Limits

Income limits to qualify for Roth IRA contributions are also rising in 2018. For single or head of household tax filers, those with a modified AGI up to $120,000 can make Roth IRA contributions up to the annual limit. With modified AGIs between $120,000 and $135,000, the annual Roth IRA contribution limit is gradually reduced, until it’s eliminated for those with modified AGIs greater than $135,000.

For married taxpayers filing joint returns, the Roth IRA contribution limits are higher. Couples with modified AGIs of up to $189,000 can make Roth IRA contributions up to the limit for 2018. The phase-out range is between $189,000 and $199,000. For modified AGIs above $199,000, Roth IRA contributions are not permitted.

More Changes to Come?

If you’ve been tuned into any of the discussions in Washington around tax reform, you’ve likely heard about ideas to change some of the existing rules around workplace retirement plans.

Rewriting tax code is a difficult undertaking at any time, with many interests outside of Washington keen to preserve the tax provisions that have aided their industries. While many proposals will be floated in the coming weeks, we won’t know what any impact to retirement plan sponsors and participants will be until the ink is dry on the final negotiated bill.