April 15 is near – but it’s not too late to follow a few tips to boost your retirement savings.
Think Spousal IRA to Boost Your Retirement Savings
For 2019, the maximum IRA contribution is $6,000 or $7,000 if you’re over the age of 50. The good news is, you can make IRA contributions for 2018 up until April 15, 2019. For 2018, the maximum IRA contribution limit was $5,500 if under 50. $6,500 if over 50.
In order to make IRA contributions, you must have earned income. Earned income essentially means compensation for services. This does not include passive income, such as capital gains, interest, or social security.
No Income? No Problem
There may still be a way to make IRA contributions even if you don’t earn an income. If you are married and your spouse earns income, you can make a contribution. The spousal IRA is a great way to increase your retirement savings. One spouse will essentially piggy back off of another spouse.
You will use your spouse’s income to make IRA contributions so long as you both file a joint income tax return.
For example, if spouse A is retired but spouse B earns an income, Spouse A can open an IRA (individual retirement account) in his/her name. He or she can then make IRA contributions up to a maximum of $6,000 or $7,000 for 2019.
One requirement is that the spouse who earns an income must earn sufficient income to cover the amount of the other spouse’s IRA contribution.
For example, if spouse B only makes $10,000, then both spouses cannot make a contribution greater than $10,000.
Pre-Tax, After-Tax & Roth Contributions
You can make contributions in pre-tax, after-tax or Roth. A pre-tax IRA, also known as a Traditional IRA, is one of the more popular ways to save for retirement, and offers several tax advantages. Traditional IRA contributions must be fully or partially deductible, dependent on your circumstances.
Generally, amounts in a traditional IRA (including earnings and gains) are not taxed until you take a distribution. However, this is not a requirement until you reach age 70 1/2.
An after-tax IRA, also known as a non-deductible IRA, is a traditional IRA that contains nondeductible contributions. Nondeductible contributions to traditional IRAs often occur when you earn too much to make a deductible contribution. It can also occur if you’re limited because of employer 401(k) plan contributions.
You can choose to make contributions that are nondeductible at any time, however, this is not a very tax-efficient strategy.
Can’t Go Solo – But Don’t Forget about the SEP
A solo 401(k) plan is a traditional 401(k) plan covering one employee. In order to be eligible to establish a solo 401(k) plan, you must be self-employed or have a small business with no full-time employees (over 1,000 hours during the year). This does not include a spouse or other owner(s).
The solo 401(k) plan has become the most popular retirement plan for the self-employed and small business owner with no full-time employees. However, in order to take advantage of all the attractive retirement and investment benefits of the solo 401(k) plan, such as high annual contribution limits, you must establish the plan by December 31, 2018 in order to make contributions for 2019.
The alternative for boosting your retirement savings is to establish a Simplified Employee Pension Individual Retirement Arrangement (SEP IRA). In the past, the SEP IRA was the most popular retirement plan for the self-employed and small business owner.
A SEP IRA is a pure profit sharing plan. It allows the employer to make up to a 25% profit sharing contribution to all eligible employees up to a maximum of $55,500 for 2018 or $56,000 for 2019. The employer can make up to 20% in the case of a sole proprietorship or single member LLC.
You can make SEP IRA contributions for 2018 through April 15. This is different than a solo 401(k) plan which requires that you establish the plan in the same year you make contributions.
The Backdoor Option to Boost Your Retirement Savings
Another tip to help boost your retirement savings is the backdoor Roth option. As of 2010, there is no longer any income level restrictions for making Roth IRA conversions. Therefore, a high income earner can do a conversion of after-tax (non-deductible) IRA funds to a Roth IRA. This is known as a ‘backdoor’ Roth IRA.
In other words, the ‘backdoor’ IRA allows a high-income earner who has exceeded the Roth IRA annual income contribution limits to circumvent the rules and make a Roth IRA contribution.
The Roth IRA contribution limit is the same as the traditional IRA limit. For 2018, the annual Roth IRA contribution limit for an individual under the age of 50 is $5,500, and $6,500 for an individual over the age of 50.
If you make Roth IRA contributions, you must reduce those contributions by the amount of any contribution you make to a traditional IRA. However, not all individual taxpayers are eligible to make Roth IRA contributions.
If you’re a taxpayer filing as single, you have to modify the adjusted gross income under $135,000 to contribute to a Roth IRA for the 2017 tax year. However, contributions are reduced starting at $120,000.
Whereas, for taxpayers filing as married, the combined modified adjusted gross income must be less than $199,000, with reductions beginning at $189,000.
Therefore, even if you’re a high income earner, the backdoor Roth IRA will allow you to make Roth IRA contributions by making an after-tax contribution and then doing an immediate Roth conversion.
Three Letters to Remember – HSA
IRC Section 223 allows anyone who is covered by a compatible health plan, often referred to as a High Deductible Health Plan (HDHP), to set aside funds on a tax-free basis up to the contribution limit to pay for certain out-of-pocket medical expenses.
Health Savings Accounts have a triple tax benefit:
- Funds go into the account tax-free
- Your funds grow tax-free
- Funds remain completely tax-free when used for eligible medical expenses
The IRS (internal revenue service) imposes certain requirements in order to be eligible to contribute to an HSA. For example, you cannot be covered by Medicare.
The maximum 2019 contribution is $3,500 for individuals and $7,000 for families. There is a $1,000 catch-up for participants over the age of 55.
Get in Touch
Planning and saving for retirement doesn’t have to be stressful. Understanding the rules and employing a consistent approach can help boost your retirement savings while reducing your tax liability for 2018.
If you still have questions about how to increase your retirement savings, contact IRA Financial Group directly at 800-472-0646. You can also speak to an IRA specialist by filling out the contact form. A specialist will get back to you promptly.