Now that we’re full stride into the holiday season, it’s time to start thinking about 401(k) year-end planning for 2018. December 31 is an important date for your retirement plan(s). Contributions, required minimum distributions (RMDs) and the saver’s credit all come to a head on New Year’s Eve.
The last calendar day of the year is also the last day you can make contributions to your 401(k) plan. For 2018, the limits are as follows:
- Under age 50 – You can contribute up to $18,500
- Age 50 and over – You may contribute up to $24,500 (which includes a $6,000 catch-up contribution for older savers)
Many people cannot reach these limits, but the least you should contribute is enough to qualify for a full employer match (if your job offers one). A typical match is 50% of the amount you contribute, up to six percent of your salary. For example, if you earned $50,000, your employer would match $3,000 based on $6,000 total contributions by you for the year.
December 31 also marks the last day you can save on next year’s tax bill by utilizing your 401(k) plan. Any traditional (or pre-tax) contributions will lower your tax bill come April. Again, if you earned $50,000 this year and contributed $5,000 to your 401(k) plan, your taxable income for the year will be $45,000. Note: if you also contribute to an IRA, you have until April 15, 2019 to contribute to that, which will also lessen your tax bill.
The tax deduction is especially important if you are close to a lower bracket. Here are the updated 2018 tax brackets:
|Tax Rate||Individuals||Married Filing Jointly|
|10%||Up to $9,525||Up to $19,050|
|12%||$9,526 to $38,700||$19,051 to $77,400|
|22%||38,701 to $82,500||$77,401 to $165,000|
|24%||$82,501 to $157,500||$165,001 to $315,000|
|32%||$157,501 to $200,000||$315,001 to $400,000|
|35%||$200,001 to $500,000||$400,001 to $600,000|
|37%||over $500,000||over $600,000|
Using our $50,000/year employee, over $12,000 of his/her income is getting taxed at 22%. If, instead, that money was contributed to a traditional 401(k), the tax bill will be significantly lower next year. And who doesn’t want that?!
Required Minimum Distributions
Did you reach age 70 ½ this past year? If so, you must start taking your required minimum distributions. There is a caveat if you are still working, as per the IRS:
April 1 of the year following the later of the year you turn 70 ½ or the year you retire (if allowed by your plan). If you are a 5% owner, you must start RMDs by April 1 of the year following the year you turn 70 ½.
As you can see, your very first RMD does not have to be taken by December 31. You have until April 1, 2019. However, if you choose this route, you will have two RMDs next year, one for 2018 and one for 2019. On the other hand, all subsequent RMDs (starting the year after you turn 70 ½) must be taken by December 31.
You RMD is calculated by using the account balance at year end along with your current age as shown in the Uniform Lifetime Table. Generally, your plan administrator will take care of this for you.
While RMDs are not required for Roth IRAs, they are for Roth 401(k) plans. So, if you have a Roth 401(k) and are turning 70 ½, you might want to consider rolling it over to a Roth IRA.
Lastly, if you have more than one 401(k) plan, you must calculate your RMD for each plan and withdraw the appropriate amount from each plan. (IRAs are afforded the option to withdraw from only one plan.)
Check out this page on IRS.gov with all the RMD info you need.
If you are a low or moderate income taxpayer, the saver’s credit awards you for squirreling away money for retirement. We’ve been heralding the benefits of the tax deduction a 401(k) contribution is afforded. However, the saver’s credit is a tax credit, meaning that your tax bill is lowered by the amount of your credit. For example, if you owe $1,000 in taxes for this year and receive an $800 savers credit, your tax bill is lowered to $200!
To qualify for the saver’s credit, your earned income for the year cannot exceed:
- $31,500 for single filers and married individuals filing separately
- $47,250 for heads of household
- $63,000 for married couples filing jointly
The amount you can earn is determined by your income and your contribution for the year. The maximum amount of the credit is $2,000 for single filers and twice that for couples filing jointly. Check out this chart to see how much you can get.
401(k) Year-End Planning Summary
It’s certainly better for you to contribute to your retirement plan(s) earlier in the year, however it’s not too late to take advantage of all the benefits a 401(k) has to offer for 2018. The IRS gets a bad rep (audits and all), but they do offer numerous ways to help us save for the future. Even lower income workers can put aside a few dollars every week towards retirement.
Finally, be on the lookout over the coming days and weeks for more year end planning guides, including IRAs and Solo 401(k) plans.