Financial Advisor Insights

New IRS Contribution Limits for 2018

The IRS has released the 2018 contribution limits. There are numerous cost of living adjustments to make note of. 

Maximum Employee Contributions to Defined Contribution Plans: Increase

For employees with 401(k), 403(b), most 457 plans, or the federal government’s Thrift Savings Plan, the contribution limit for 2018 has increased $500, to $18,500. 

Maximum Employer After-Tax Additions to Defined Contribution Plans: Increase

The annual additions limit for employers has increased $1,000 to $55,000 in 2018.

Annual Catch-up Contributions for Employees Over 50: No Change

Workers over 50 years old with defined contribution plans (401(k), 403(b), most 457 plans, or the federal government’s Thrift Savings Plan) can expect another level catch-up contribution limit of $6,000 in 2018.

Self-employed and Small Business Owners: SEP IRA and Solo 401(k) Limits: Increase

The total annual contribution limit for both SEP IRAs and Solo 401(k)s has increased $1,000 to $55,000 in 2018. However, the amount that can actually be added each year is subject to an additional limitation: a percentage of W-2 earnings or net self-employment income. In 2018, the compensation limits for these calculations increased $5,000 to $275,000.

SEP IRAs are funded solely by employer contributions. Solo 401(k) plans can be funded by a business owner in two ways: as the employee and the employer, subject to the maximum annual additions limit. Like a traditional 401(k) plan, maximum employee contributions in 2018 has increased $500 to $18,500 for the solo 401(k). As previously mentioned, the employer component is subject to limitations based on earnings. Learn more about retirement planning for small business owners

SIMPLE IRA and SIMPLE 401(k) Contributions: No Change

Assuming the employee does not participate in another retirement plan, the maximum contribution to a SIMPLE IRA or SIMPLE 401(k) plan remain unchanged in 2018 at $12,500 and $3,000 for catch-up contributions for those over age 50.

However, an employer may either make matching contributions or nonelective contributions to the plan. If the employer makes nonelective contributions, the covered compensation limit has increased to $275,000 in 2018.

Traditional IRAs: No Change

The annual contribution limit for traditional IRAs will not change in 2018 and will remain at $5,500 with an additional $1,000 catch-up contribution for those over age 50. Just about any individual with earned income under age 70 1/2 can contribute to a traditional IRA, however their additions may not be deductible. In 2018 the income phase-out bands that determine whether all (or a portion of) contributions are deductible will increase slightly. Learn more about traditional vs Roth IRAs.

The Deductible IRA Limits for 2018 are as Follows:

If you ARE covered by a retirement plan at work:

                                            Tax Filing Status & Modified Adjusted Gross Income Limits

Deduction Single Married filing jointly
Full $63,000 or less $101,000 or less
Partial; deduction begins to phase out More than $63,000 and less than $73,000 More than $101,000 and less than $121,000
Non-deductible  Above $73,000 Above $121,000

 

If you are NOT covered by a retirement plan at work:

                                          Tax Filing Status & Modified Adjusted Gross Income Limits

Deduction Single and married filing jointly (neither spouse covered) Married filing jointly - one spouse covered
Full Any $189,000 or less
Partial; deduction begins to phase out   More than $189,000 and less than $199,000
Non-deductible    Above $199,000

 

Roth IRAs: Increase to Income Eligibility 

Like the traditional IRA, the contribution limits remain unchanged for 2018. However, the income phase-out limits will increase slightly. The phase-out range for single filers will be between $120,000 - $135,000 and for married couples filing jointly $189,000 - $199,000. Learn more about traditional vs Roth IRAs.

Health Savings Accounts (HSAs): Increase

Health savings accounts will see a slight change in 2018. To qualify for a HSA you must have a high deductible health plan (HDHP). To be classified as a HDHP, the plan must have a minimum annual deductible of $1,350 for individual plans and $2,700 for family plans, an increase of $50 and $100 from 2017, respectively. In 2018, qualified participants may make pre-tax contributions of up to $3,450 for individual plans (up $50 from 2017) and $6,900 for family plans (up $150 from 2017). Learn more about HSAs.

Flexible Spending Accounts (FSAs): Increase

Employer-sponsored FSAs may have two components: a health FSA and/or a dependent care FSA. In 2018, annual contributions to a health FSA will increase $50 to $2,650. As of now, the dependent care FSA remains unchanged at $5,000 for single parents or married couples filing jointly. Learn more about FSAs.

Social Security Taxable Wage Base: Increase

Despite 2017's large increase to the taxable Social Security wage base, there will be another increase in 2018. Next year the taxable wage base will increase $1,500 from $127,200 to $128,700. The current tax rate for social security is 6.2% for the employer and 6.2% for the employee.

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