Retirement planning is absolutely fundamental if you plan to secure your financial future. With many retirement savings options available, it’s important to know the inner workings of the plans you decide on to ensure you’re getting the most out of your money. Two of the more commonly known contribution plans are the 401k and IRA account. Both involve annual contributions.
The IRS recently changed 2018 retirement contribution limits for 401K and IRA accounts. With these changes, it’s possible for you to start saving even more for your future. Unsure how these accounts work? Today, the Fogel Capital Management, INC., team in Stuart, FL, will bring you up to speed on all the details.
IRAs versus 401ks
One of the biggest changes between saving for retirement now as opposed to a generation ago is that it’s much less likely now to use defined benefit plans. Currently, retirement plans are defined contribution plans, which essentially means that you (and, in many cases, also your employer) have to contribute a specified amount of money on a regular period into a tax-deferred account. Eventually, you will receive a payout when you retire that is based on your account’s market value.
A 401k is a retirement plan sponsored by your employer. Most employers will provide a matching contribution up to a certain percentage of your salary (in many cases around 6%). All money contributed is taken before tax, which means you are not required to pay taxes on that money; however, you will be taxed once it’s withdrawn. Many employers will limit you to certain investment choices, but beyond that, you can contribute with automatic payroll deductions.
While 401ks are often employer based, IRAs allow anyone to contribute to the account, provided they are under the age of 70 ½. As with 401ks, your assets will not be taxed until you withdraw them during retirement. It’s also possible to get tax-deductible contributions if you aren’t a part of a plan sponsored by your employer.
A variation of the IRA is the Roth IRA. With the Roth IRA, you have to pay tax on all your income before you can contribute to your account. After you retire, however, you will not have to pay taxes on withdrawals made. That said, not everyone can qualify for a Roth IRA. If you are single, your gross income must be less than $120,000; if filing jointly as a married couple, your adjusted gross income should not be more than $189,000.
Retirement contribution limits
There are trillions of dollars to be found in 401ks and IRAs, but the IRS has limits on how much you can contribute per year. As of 2018, the IRS allows you to contribute even more, allowing you to save better for retirement.
For 401ks, the contribution limit went up by $500 to $18,500. This is also valid for 403b and 457 plans. If you’re over the age of 50, catch-up contributions stay at $6,000, so your annual contribution limit is $24,500.
For IRAs, the same $5,500 contribution limit from last year applies with a catch-up contribution of $1,000. While the limit may seem insignificant, it’s important to remember that tax breaks and compounding interest allow your money to multiply if you have an actionable, long-term plan in mind. Deadlines for IRA contributions tend to be April 15 of the following year.
As for Roth IRAs, there has been a slight increase in the income limits necessary to qualify for 2018. Your modified adjusted gross income (or MAGI) has to be less than $120,000 if you want to contribute the maximum amount to your Roth IRA. However, once your MAGI surpasses $135,000, the contribution amount will be phased out. This is up from $118,000 to $133,000 from the previous years. For married couples, the MAGI must be under $189,000, and the maximum contribution amount phases out after $199,000. In 2017, it was up from $186,000 to $196,000.
It’s recommended that if you are eligible for both an IRA and 401k, to let them both work together for you. By enrolling in your company’s 401k, contributing the matched amount, and contributing the maximum for your IRA, you can not only diversify your assets but also help to reduce your investment risk. That said, is important to ensure you’re qualified and pay close attention to all contribution and income limits as well as deadlines to get as many benefits as possible.
At Fogel Capital Management, INC. in Stuart, FL, we can assist with retirement planning as well as personalized investment management custom tailored to your unique situation, preferences, and needs. That way, you can be 100% certain that your financial future is truly secure. Reach out to secure your financial future.