Overview of New Limitations
Pursuant to IRS Notice 2018-83 (the “Notice”), for the 2019 tax year, the annual contribution limit has increased from $18,500 to $19,000 for employees who participate in an employer sponsored retirement plan under Internal Revenue Code (“IRC”) Sections 401(k) and 403(b), as well as most IRC Section 457 government retirement plans and the federal government’s Thrift Savings Plan. Individuals who are aged 50 and over may provide an additional catch-up contribution of $6,000, which is unchanged from 2018.
In addition, the limit on annual contributions to an IRA plan has increased from $5,500 to $6,000. Individuals who are aged 50 and over may provide an additional catch-up contribution of $1,000, which is also unchanged from 2018.
If a taxpayer’s compensation exceeds these limits, then his or her contribution cannot exceed the limit. However, if the limit exceeds the taxpayer’s compensation, then his or her contribution cannot exceed the taxpayer’s compensation. In the case of a married couple, each spouse may contribute to his or her respective retirement plan up to the applicable dollar limit if the spouses’ combined compensation is at least equal to the contributed amount.
The Notice also confirms other key limitations:
Additional IRA Planning Considerations
An individual makes a contribution to a traditional IRA plan on a pre-tax basis. Further, an individual may claim a deduction for such contribution up to the IRA contribution limit if neither the individual nor the individual’s spouse actively participates in an employer-sponsored retirement plan. However, this deduction may be phased out depending on whether the individual or individual’s spouse is covered by a retirement plan at work. Pursuant to the Notice, the phase-out ranges for 2019 are identified in the table below. These limitations are based on a taxpayer’s adjusted gross income (“AGI”). If a taxpayer’s AGI exceeds the top of the phase-out range, then no deduction is allowed.
|
Filing Status |
Covered by Workplace Retirement Plan? |
Spouse Covered by Workplace Retirement Plan? |
AGI Phase-Out Range |
|
Single/Head of Household |
Yes |
N/A |
$64,000 - $74,000 |
|
Married Filing Jointly |
Yes |
N/A |
$103,000 - $123,000 |
|
Married Filing Jointly |
No |
Yes |
$193,000 - $203,000 |
|
Married Filing Separately |
Yes |
N/A |
$0 - $10,000 |
Those making contributions to Roth IRA plans will also benefit from the increased contribution limit of $6,000. Unlike contributions to a traditional IRA plan, contributions to a Roth IRA plan are not deductible. Rather, they are post-tax contributions which can benefit taxpayers who anticipate that they will be in a higher tax bracket when distributions are later received from the retirement plan. Moreover, qualified distributions are tax-free when received. Thus, Roth IRA plans provide the potential benefit of rate arbitrage when taxpayers may pay tax at lower rate upon contribution and then pay no tax on a future distribution when in higher tax bracket. A qualified distribution is a distribution that (1) is made after the five-taxable-year period beginning with the first taxable year for which the individual first contributed to the Roth IRA, and (2) is made after attaining the age of 59½, on account of death or a disability, or is made for first-time homebuyer expenses up to $10,000.
However, the ability to contribute to a Roth IRA plan is governed by AGI phase-out ranges as identified in the following table. If a taxpayer’s AGI exceeds the top of the phase-out range, then no contribution is allowed.
|
Filing Status |
AGI Phase-Out Range |
|
Single/Head of Household |
$122,000 - $137,000 |
|
Married Filing Jointly |
$193,000 - $203,000 |
|
Married Filing Separately |
$0 - $10,000 |
Notably, an individual may not make a contribution to a traditional IRA for the year in which he or she attains age 70½.
Savers’ Credit
The AGI limit has also increased for those individuals eligible to receive an income tax credit for making qualified retirement savings contributions (“Savers’ Credit”). The Savers' Credit is available in addition to any deduction or exclusion that would otherwise apply to a contribution.
Qualified retirement savings contributions include elective deferrals to plans under IRC Sections 401(k), 403(b), and 457, as well as to traditional IRA and Roth IRA plans. For purposes of the Savers’ Credit, the amount of qualified retirement savings contributions is reduced by the aggregate amount of distributions received during the two preceding tax years, the current tax year, and the period after such current tax year before the due date of the tax return for the current tax year.
The credit equates to the product of an applicable percentage and the amount of such qualified retirement savings contributions that do not exceed $2,000. The below chart provides the applicable percentage based on the applicable AGI limits for 2019.
|
Filing Status |
AGI Phase-Out Range |
Applicable Percentage |
|
Single/Head of Household |
$0 - $28,875 |
50% |
|
$28,876 - $31,125 |
20% |
|
|
$31,126 - $48,000 |
10% |
|
|
Above $48,000 |
0% |
|
|
Married Filing Jointly |
$0 - $38,500 |
50% |
|
$38,501 - $41,500 |
20% |
|
|
$41,501 - $64,000 |
10% |
|
|
Above $64,000 |
0% |
|
|
All Others |
$0 - $19,250 |
50% |
|
$19,251 - $20,750 |
20% |
|
|
$20,751 - $32,000 |
10% |
|
|
Above $32,000 |
0% |
Planning Considerations – Effect of New Tax Law
The increased contribution and AGI phase-out limitations may provide additional flexibility to taxpayers who engage in retirement savings planning during 2019.
In addition, taxpayers should consider the effect of the new tax rate structure under the Tax Cuts and Jobs Act of 2017 (“TCJA”) when deciding whether to contribute to certain types of plans, e.g. traditional IRA versus Roth IRA. For example, if a taxpayer moved into a lower tax rate bracket as a result of the TCJA, post-tax contributions to a Roth IRA, where eligible, may prove beneficial if that taxpayer expects to move into a higher tax rate bracket in the future.
Finally, the TCJA did not impact a taxpayer’s ability to recharacterize a Roth IRA contribution as a traditional IRA contribution or vice versa before the due date (including extensions) of the individual’s income tax return for the tax year in which the original contribution was made. Such recharacterizations are accomplished by a trustee-to-trustee transfer, and the recharacterization will be treated as having been made to the transferee IRA as of the date of the original contribution.
In addition, an individual may still convert a traditional IRA to a Roth IRA. The amount converted is included in gross income. The conversion is accomplished either by a trustee-to-trustee transfer, or by a distribution from the traditional IRA and contribution to the Roth IRA within 60 days.
However, the TCJA did eliminate the ability of a taxpayer to undo or unwind a conversion to a Roth IRA through a later recharacterization to a traditional IRA.
Taxpayers have much to consider when planning for retirement and should analyze the additional tax savings opportunities presented by the increased limitations. For additional guidance, please consult your FGMK tax advisor.
|
Daniel Laughlin |
The summary information in this document is being provided for education purposes only. Recipients may not rely on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.