Proactive planning for your retirement can help you have the necessary funds to live comfortably in retirement without worrying about going back to work. IRAs, HSAs, 401(k)s, and other accounts allow you to multiply your savings with unique tax benefits not available with other accounts. One way to maximizing the amount you have when you retire is contributing as much as possible to your plan. Every type of account has a limit on how much you can contribute each year so it’s wise to make an extra contribution if possible before the tax year ends.
Here are important reminders to help you maximize your savings.
401(k)
Deposits to a 401(k) plan are due by December 31st every year. December 31, 2017 falls on a Sunday, which means the last day for a contribution is Friday, December 29th. Because 401(k) deposits are usually made through payroll withholding, it can take one to two pay periods for a change to be processed. Make it a goal to increase your deposit 2-3 weeks before the end of the year.
By increasing your 401(k) deposits, you can reduce your 2017 tax bill by lowering your earned income. If you contribute the maximum (1) this year and you are in the 25% tax bracket, you can reduce your taxes by $4,500. For 2017, the contribution limit for a 401(k) is $18,000. Workers who are at least 50 years of age can make an additional $6,000 catch-up contribution, or up to a total contribution of $24,000. Roth IRA A Roth IRA is an after-tax account. This means your deposits are not tax-deductible, but qualified withdrawals when you retire will not be taxed.
A Roth
IRA account is completely tax free as long as it’s used correctly. The contribution limit for a Roth IRA is $5,500 in 2017 or $6,500 for people who are 50 or older. There are income limits to qualify for direct Roth IRA contributions. Deposits are only allowed if your income is below a specific threshold (2) based on your filing status, however. For single filers, the threshold begins at $118,000 in 2017 and ends at $133,000. At this range, the contribution will be limited and eventually reach $0. For couples who are married filing jointly, the income threshold begins at $186,000 and ends at $196,000.
The deadline to make 2017 contributions to an IRA (3) is April 17, 2018.
Traditional IRA
A traditional IRA is a tax-deferred account which means deposits can be tax deductible, but withdrawals when you retire will be taxable.
A traditional IRA has a contribution limit of $5,500 (4) in 2017. These limits apply per person, not per account. This means your total contribution to all IRAs cannot exceed $5,500 in 2017, even if you have several accounts. If you are 50 or over, you can contribute an extra $1,000 for $6,500 total.
As with a Roth IRA, the deadline to make a 2017 contribution (5) to a traditional IRA is April 17, 2018.
SEP IRA
A Simplified Employee Pension (SEP) IRA is an IRA for business owners to give benefits to employees and themselves. Business owners, including sole proprietors, can establish these accounts.
A SEP IRA for a sole proprietor must be established and funded by April 17, 2018 for tax year 2017. If you file an extension, you have until October 15, 2018 to contribute to a SEP IRA for 2017.
For 2017, the contribution you can make (6) to a SEP IRA is the lesser of 25% of compensation or $54,000. Those who are self-employed need to use a special rule (7) for calculating the allowed contribution.
HSA
A Health Savings Account is a unique savings account for health care expenses. These accounts are tied to High Deductible Health Plans (HDHP) and allow workers to contribute pre-tax money to be used for health care. HSAs have become popular as a vehicle for retirement planning because the funds can continue to grow and withdrawals will never be taxed as long as the money is used for health care.
The deadline to contribute to an HSA for tax year 2017 is April 17, 2018.
The annual contribution limit for an HSA (8) depends on whether you have a family or individual plan. An individual can contribute up to $3,400 per year. Families can contribute up to $6,750. Adults who are at least 55 can make an additional $1,000 catch-up contribution.
As always, if you ever have questions, we are here to help, and can be reached at 888-500-5830.
1 https://www.fool.com/investing/2017/09/07/3-retirement-accounts-you-should-try-to-max-out.aspx
2 https://www.irs.gov/pub/irs-drop/n-16-62.pdf
3 https://www.irs.gov/retirement-plans/ira-year-end-reminders
4 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
5 https://www.thebalance.com/annual-ira-contribution-deadlines-2894496
6 https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps-contributions
7 https://www.irs.gov/retirement-plans/self-employed-individuals-calculating-your-own-retirement-plan-contribution-and-deduction
8 https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-sets-2017-hsa-contribution-limits.aspx
DA-000667.1