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New Rules Guiding Your IRA Contribution

New Rules Guiding Your IRA Contribution

There has been few changes to the rules guiding your IRA contribution and dollar amounts. We have been working with some of you on these IRA accounts, hence wanted to bring it to a broader attention.  Let us do a quick re-cap of the account categories from a taxation perspective:

TAX NOW: Joint, Individual, Trust Accounts
TAX DEFERRED: 401k, Traditional IRA, Rollover IRA, SEP IRA
TAX NEVER: Roth IRA, 529 Plans, Life Insurance

There is a huge advantage to maximizing contributions in the ‘Tax Never’ category. Many of you are using 529 plans to fund college expenses. Roth IRA is the category that is somewhat less understood. On a related note, Life Insurance has advantages where death benefits can be passed on to heirs without estate tax impact.

Maximizing your Tax deferred and Tax Free  account sizes are important for a few reasons

    1. Minimize income taxes both in accumulation years and retirement years
    2. Mitigate tax impact of asset classes like Bonds and Liquid Alternatives which are tax inefficient, and
    3. Take advantage of additional benefits of Roth Accounts like No Required Minimum Distributions in retirement.

So, let us review the summary of retirement account contributions for Tax year 2018

 401k

    • Pre-tax elective contributions – $18.5K / year , $6000 Catch Up (if over 50), Employer matching is separate.
    • Post-tax elective contributions – Up to $33.5K/year <effective July 1 2018>: only some companies offer this benefit, so please check with your employer
    • Mega-backdoor Roth – Please see below <under Roth IRA Accounts>

401k Roth

    • Contribution limits – same as 401(k) accounts <see above>

Traditional IRA

    • Elective contribution – up to $5,500/year <$6,500 if over 50>
    • Allowed even if you are already contributing to your employer’s 401k plan

Roth IRA

    • Elective contribution – up to $5,500/year < 6,500 if over 50> provided you meet conditions a) or b) Contribution is allowed even if you are already contributing to your employer’s 401k plan
      • Annual Gross income limit of $199K if Married filing jointly, or $135K for single tax filers
      • If all your retirement assets are held in 401k – then you can make the elective contribution to a Traditional IRA, and roll it over into a ROTH Account. This step is also called ‘back-door Roth conversion
    • Elective contribution – up to $37K possible if your company offers the benefit to contribute to a Roth within 401k account. This is also known as ‘Mega backdoor Roth contribution’

SEP  IRA

    • Employer contribution – 25% of wages up to $55K/year

If you have a question regarding how these benefits affect you, please schedule a call to discuss, at your convenience. We are here to help you.

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