By: Ethan R. Okura
There’s no question about it: Saving for retirement is not easy.
There are quite a few types of retirement accounts. Each has its own rules and tax benefits, although, for the most part, they tend to be similar. The amounts you can contribute, however, vary from plan to plan. The Internal Revenue Service recently announced higher limits for allowed contributions to your retirement savings. These new limits are effective January 2019, which might help some of us to save more for retirement — if we can tighten our belts a little.
These days, very few companies offer retirement pensions, leaving retirement saving almost entirely up to the employee. Many state and local governments still offer pensions, however. For the average corporate employee, most companies offer a 401(k) plan. Employees of a public school or nonprofit corporations are usually offered a 403(b) Plan, also known as a Tax Sheltered Annuity (or TSA plan), by their employers.
If you are self-employed, you can set up and contribute to a Simplified Employee Pension (SEP), a 401(k) plan or a Savings Incentive Match Plan for Employees (SIMPLE IRA Plan). Whether you are self-employed or working for a large corporation, there are also other less common plans that might be available to you, such as a Profit Sharing Plan or a Defined Benefit Plan. You may also be eligible to contribute money to an IRA or a Roth IRA.
Most retirement plans let you set aside money for the future and take a tax-deduction for it now. Invested retirement funds can then grow without your paying taxes along the way, as long as the money stays in the retirement account. When you start to access the money during retirement, you claim the income on your tax return at the time you withdraw funds from the retirement account. This makes sense for most people who will likely be in a lower tax bracket during retirement. Also, the tax deferral can help to grow the retirement savings larger with compounded earnings that aren’t diminished by tax payments along the way.
For a Roth IRA or the Roth portion of a 401(k), you do not receive a current tax deduction for your contribution to the retirement account. In other words, you pay taxes now on the money going into the Roth IRA or Roth 401(k), even though you cannot spend it now. However, it will grow tax-free and when you draw out the money when you are retired, it will be completely tax-free! (This is assuming you’ve had the account for at least five years and that you are at least 59½ years old at the time, with a few exceptions.).
So how much can you actually put into these accounts? For IRAs and Roth IRAs, the new contribution limit for 2019 is $6,000. This is the first cost of living adjustment since 2013! If you are over age 50, you can also make a catch-up contribution to help you save more for retirement. The catch-up limit for IRAs is an additional $1,000. Unfortunately, the IRA catch-up contributions are not increased for inflation or cost of living, so they stay at $1,000. For a SIMPLE IRA Plan, you can contribute up to $13,000, with a $3,000 catch-up contribution if you are at least 50 years old.
For 401(k), 403(b) and profit sharing plans, you can contribute up to $19,000, with an additional catch-up contribution of up to $6,000 for those 50 years old. Your employer could also match or make other contributions up to a total maximum (including your salary deferral) of $56,000. The SEP also has a $56,000 maximum contribution limit.
Certain portions of these retirement contributions must be funded before Dec. 31, 2018. Some must be done by the time your tax return is due. You may want to check with your accountant, financial advisor or tax attorney to verify what you can do to save on taxes and for retirement before the year is out.
The rules regarding retirement accounts are very complicated. There are income limits above which you might not be able to contribute to certain types of retirement accounts. There are also income limits above which your ability to deduct the contribution gets phased out. There are so many rules that it’s hard to know them all. I have a 600-plus-page book written for lawyers as a reference manual that I refer to when I need to find an obscure rule. But it’s worth it for you to learn a little about the basics because it could mean the difference between retiring comfortably — or not at all.
© OKURA & ASSOCIATES, 2018