The IRS has released Notice 2018-83 which details the IRA Contribution Limits for tax year 2019 and the critical changes investors should know about the new annual contribution limit.
In this article:
- Roth IRA Income Limits 2019
- Roth IRA Contribution Limits 2019
- Simplified Roth IRA Contribution Examples 2019
- Traditional IRA Income Limits 2019
- SIMPLE IRA Contribution Limits 2019
- 401(k) Contribution Limits
- How These Changes Impact Your Investing
2019 Updated IRA Contribution Limits
Roth IRA Income Limits 2019
The IRS has increased the income limits for any Roth IRA account. These income limits are technically known as phase-out ranges, which is the annual income bracket that can contribute to the Roth IRA without any penalties. This legal limitation makes Roth IRA a lousy choice for investors with a high net worth, as penalties can reduce your contributions from 70% to 100%, severely limiting your nest egg.
The IRS gave phase-out Roth IRA income limits an increase for virtually all categories. For those who are single taxpayers and are the heads of the household, income limits have increased. The phase-out range is now $122,000 to $137,000, up from $120,000 to $135,000.
Phase-out ranges also see an increase for those who are married filing jointly, or for a qualifying widow or widower. The limits are now $193,000 to $203,000. Previously, the limits were $189,000 to $199,000.
Lastly, those who are married filing separately who contribute to a Roth IRA will have income limits of $0 to $10,000.
Roth IRA Contribution Limits 2019
A refresher on Roth IRA contributions is in order. The rules for Roth IRA contributions and their penalties are actually pretty straightforward.
Investors who earn less than the starting income limit can make full contributions without any penalties. For example, if you are 55 years old, single, and the head of the household, and you earn $100,000 a year, you can contribute $7,000 every year, which is the current maximum.
Investors who earn more than the income limit cannot contribute to a Roth IRA. For example, if you are 60 years old, married, and you file a separate return and have a Roth IRA, and earn $50,000 a year, you are not allowed under the law to make any Roth IRA contributions.
For those who are within the phase-out range, the contribution system can be a bit more complicated. Those who are single and are head of the household lose 10% for every $1,500 from the lowest income limit. Those who are married will lose 10% of the maximum contribution limit for every $1,000 above the lowest income limit under the law. Maximum base contributions for a Roth IRA is $6,000 for those below 50 and $7,000 for those 50 or above. All these numbers come from the IRS contribution limits guideline.
Simplified Roth IRA Contribution Examples 2019
Let’s look at someone who is single, the head of the household, 45 years old and earns $126,500 a year. The maximum Roth IRA contributions for this individual will go down to $4,200 from the original $6,000 maximum contribution. This is because this person earns $4,500 more than the income limit of $122,000, which corresponds to a 30% reduction in maximum contributions as the individual earns higher by three $1,500 levels.
In the same vein, married taxpayers have a similar maximum contribution system. If you are married, 52 years old, earn $200,000 and you file taxes and contribute jointly, then your maximum IRA contribution limits will have a cut of 70%. That means you can only contribute up to $2,100 annually since you will lose $4,900 in maximum cap limitations.
Lastly, having a refresher on Roth IRA tax status is a good idea. Traditional IRAs reduce your AGI (adjusted gross income) because your contributions are tax deductible. On the other hand, Roth IRAs do not decrease your AGI. Contributions are post-taxes, meaning they have already been taxed and do not effect your AGI.
Reading and reviewing how a Roth IRA works can help you plan your finances. A Traditional IRA has interesting differences, and knowledge of its features can help a lot of investors. Comparing the pros and cons between a Roth IRA and Traditional IRA can save you money and make your retirement plan easier.
Traditional IRA Income Limits 2019
Like the Roth IRA phase-out ranges, the Traditional IRA also has increased its maximum income limits. The only exception is for married individuals filing separately. They file their returns with a workplace retirement plan as their phase-out range remains the same.
For those who are single and concurrently have an employer retirement plan, the range is now $64,000 to $74,000. These numbers are up from $63,000 to $74,000.
For those who are married and do not have a workplace retirement plan while the spouse has an employer retirement package, the limits are now $193,000 and $203,000. These numbers are up from $189,000 and $199,000.
For the taxpayers who are married, file their returns jointly and have an employer retirement plan coverage, the limits are now $103,000 to $123,000. Previous income limits were $101,000 to $121,000.
Contribution limits have seen an increase of $500. As of 2019, the annual contribution for those below 50 years old is now $6,000, up from $5,500. Those who are 50 years old and above now have limits of $7,000, up from $6,500.
SIMPLE IRA Contribution Limits 2019
Savings Incentive Match Plan for Employees, also known as SIMPLE IRA, have seen an increase as well. The standard limit is at $13,000, which is a $500 increase from the 2018 limit of $12,500. For those who are 50 years old or above, the Catch-Up Provision as per IRS SIMPLE IRA allows an additional $3,000 limit. That pushes SIMPLE IRA contributions up to $16,000.
SIMPLE IRA contribution limits account for both employer and employee contributions. Employers can use the matching contribution process or the nonelective contribution. In matching contributions, the employer can contribute up to 3% of the employee’s compensation. Under the nonelective contribution, employers contribute 2%.
401(k) Contribution Limits
401(k) plans have also seen an increase. Together with Solo(k) plans, the standard pre-tax limit is now $19,000 from $18,500 of 2018 for investors below 50. Catch-up limit is still at $6,000, so investors 50 or older can contribute $25,000.
For those who still want to contribute more, post-tax maximum contributions are now at $56,000 for investors younger than 50. The limit for investors 50 or older is at $62,000.
For SIMPLE 401(k) plans, catch-up contributions only amount to $3,000. Also, remember that the IRS treats excess withdrawals as income, so if you withdraw excess contributions on April 15, 2018, the excess income is part of the 2018 returns, not 2019. The IRS 401(k) Resource Page has critical information about 401(k) retirement planning and investing, so check it out if you have the time.
How These Changes Impact Your Investing
Self-directed IRA contribution limits follow the framework of conventional IRAs. The limits are now $6,000 for those below 50 years old and $7,000 for the ones who are 50 and above. Unlike other retirement accounts, a self-directed IRA can have alternative investments that standard IRAs cannot accept, thus offering the potential for greater diversification and investment asset flexibility.
Most of these updates score a big win for investors. Higher IRA contribution limits mean a bigger nest egg. With these increased IRA limits, retirement plans can provide a bigger diversified investment vehicle that gives a stable movement and growth for people looking forward to their retirement.
Are you planning to max out your contributions for this year? Have you withdrawn any excess contributions to avoid the hefty penalties? Let us discuss in the comments section below.
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