Whether you’re self-employed or working for someone else, tax filing season is a great excuse to start thinking about strategies to lower your taxable income and maximize your retirement savings.
You still have time. You have until April 15 to make contributions to your retirement accounts and have it apply to the 2018 tax year. If you file for an extension, your deadline for doing this in 2019 is October 15.
The following information will be especially useful if you discover or suspect you’ll owe money, or you just want to increase the size of your refund. And who doesn’t?
- The IRS specifies that the maximum limit for annual 401(k) plan contributions for the 2018 tax year is $18,500 if you’re under age 50. If 50 or older, you can contribute as much as $24,500. However, be sure to check the rules for your 401(k) first. Some plans specifiy that contributions can only be made through payroll deductions. If you’re not sure about the policy in your workplace, just ask. If you’re self-employed and have a Simplified Employee Pension (SEP), you won’t face that obstacle.
- If you don’t have a workplace 401(k), you can contribution to an Individual Retirement Account (IRA). The maximum contribution limit in 2018 for both traditional and Roth IRAs is $5,500, with an additional catch-up contribution of $1,000 if you’re 50 or older.
- Claiming a tax deduction for IRA contributions if you already have a workplace retirement account is based on your modified adjusted gross income (MAGI). You can claim a deduction if your 2018 MAGI didn’t exceed $63,000 for single or head of household, phasing out completely at $73,000. Married couples filing together can make as much as $101,000 before the deduction starts to phase out, and it tops out at $121,000.
- If you’re married and only one of you is covered by a workplace plan, the spouse who isn’t covered can claim the full deduction for an IRA if your total MAGI doesn’t exceed $189,000 in 2018. The deduction is fully phased out at a joint MAGI of $199,000.
- If you are self-employed, the annual contribution limit for SEP IRAs in tax year 2018 is $55,000, and for SIMPLE IRAs it’s $12,500. If you’re age 50 or older you can contribute an additional $3,000.
- Although contributing to a Roth IRA won’t lower your taxable income since contributions are made after-tax, I’ve included the income limitations since it is a question asked by individuals quite frequently. For 2018, the limit for contributing the maximum to a Roth IRA is $120,000 for singles and $189,000 for married couples. If you’re single and make above $135,000 or married and make more than $199,000 you can’t contribute anything directly to a Roth IRA.
- In 2019 the income limits increased for Roth IRAs. Individuals can contribute as much as the after-tax maximum if MAGI doesn’t exceed $122,000 (single filers) and $193,000 (married filers). However, contributions to Roth IRAs are completely disallowed at MAGI of $137,000 (single filers) and $203,000 (married filers). The silver lining here is if your employer offers a Roth 401(k) option, there are no income limitiations.
- Finally, the Savers Credit is available to individuals and heads of households who earned up to $31,500 in 2018, and married couples who earned a maximum of $63,000. If you meet these income limits and contribute to any qualified retirement account, you could earn a credit of 10-50% of your retirement account contribution (up to a $2,000 per person limit if married). Credits are dollar-for-dollar reductions of taxes owed, however the Savers Credit is non-refundable. That means that if you’re already receiving a refund the credit won’t boost the refund, but it can reduce taxes owed to zero.
Taxation is rarely a pleasant topic, but with the right guidance you can reduce your financial burden, make your retirement more secure, and April 15 a day you no longer dread so much.
Erin Silkowski, CPA is a Supervisor at Wiss. She can be reached at ESilkowski@Wiss.com or (973) 994-9400.