The IRS recently announced that next year you can save more in different types of tax-advantaged retirement plans. Find out six ways the new tax rules affect your retirement.
5. You’re eligible for a Roth IRA with higher income.
Unlike a traditional IRA that comes with an upfront tax deduction, contributions to a Roth IRA are made on an after-tax basis. But you’re allowed to withdraw original contributions and earnings from a Roth that are completely tax-free in retirement. That can add up to massive tax savings.
One beauty of a Roth IRA is that eligible participants can max it out every year, even if you or a spouse participate in a retirement plan at work.
One beauty of a Roth IRA is that eligible participants can max it out every year, even if you or a spouse participate in a retirement plan at work. There are no limitations because, as I mentioned, contributions to a Roth are not tax-deductible. Roth benefits come on the back end when you take money out of the account.
Problem is, high earners don’t qualify for a Roth IRA under any circumstances; however, the income limit does increase slightly next year. Here are the new Roth IRA income limits by tax filing status for 2019.
- For single taxpayers, the income threshold increases $2,000 from $135,000 to $137,000. When you earn between $122,000 and $137,000, you’re allowed a reduced contribution limit. And when you earn less than $122,000, you can max out a Roth IRA.
- For married taxpayers filing jointly, the income threshold increases $4,000 from $199,000 to $203,000. When you earn between $193,000 and $203,000, you’re allowed a reduced contribution limit. And when you earn less than $193,000, you can max out a Roth IRA.
- For married taxpayers filing separately, the income threshold remains $10,000. When you earn up to $10,000, you’re allowed a reduced contribution, but if you earn more than $10,000, you’re locked out of a Roth IRA.
6. You can contribute more to a retirement plan if you’re self-employed.
If you’re self-employed either full- or part-time, there’s good news for you, too. The annual contribution limits are going up next year for a variety of small business retirement accounts.
For those with a solo 401(k), also known as a one-participant 401(k) plan, the contribution limit increases $1,000 from $55,000 to $56,000 in 2019. And if you’re over age 50, you can also make $6,000 in additional catch-up contributions, for a total contribution limit of $25,000.
As the owner of your business, you can also make solo 401(k) contributions up to 25% of your compensation, for a total contribution up to $56,000 per year, or $62,000 if you’re over age 50.
A popular retirement plan for those who are self-employed, either with or without employees, is a SEP-IRA. The contribution limit can’t exceed the lesser of 25% of compensation or $56,000 for 2019. But catch-up contributions are not allowed with a SEP plan.
This isn’t a complete list of tax changes for retirement plans, but this includes the most popular types of accounts. Be sure to visit IRS.gov for more details or consult with a qualified accountant if you have questions about your financial situation.
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