As we roll full steam into the New Year 2019 it helps to be aware of a handful of changes related to taxes and tax-deductible contributions to 401k plans, IRAs and the like.
Important to recognize (when in a calm state of mind) is that with last year’s introduction of one of the most sweeping tax law changes in decades, filing for tax year 2018 may contain both pain, in terms of lost SALT deductions, and valuable lessons for how to proceed in tax year 2019. In the meantime, consider the following.*
The Basics
In tax year 2019, the maximum contributions to 401k and IRA accounts have increased to:
- IRA max of $6,000 (up from $5,500) although the additional $1,000 “catch-up” contribution for those 50 and over remains the same.
- Last year’s 2018 IRA contributions can be made all the way up until April 15th – and remember the spousal contribution (may or may not be tax-deductible).
- 401k max of $19,000 (up from $18,500) with the additional $6,000 “catch-up” remaining the same.
- The strategy of splitting your 401k contribution between the Traditional (pre-tax) and Roth (after-tax) 401k is increasingly worth considering.
- This strategy is regardless of your age or income level.
Maxing out (to the extent you can) in these vehicles can help minimize taxes in the present or the long-term (after age 65)… or both. Not to mention long-term increased savings, especially for younger people.
Roth IRA conversions (including partial conversions) still make a great deal of sense – on a case by case basis. Bottom line, a conversion leads to increased taxable income in the year of conversion in an attempt to greatly reduce taxable income in the future. Currently no income limits on Roth IRA conversions.
Other Items Worth Considering
Charitable Gifting can be a way to recoup lost deductions if “bunched”. This strategy will become more popular for those for whom charitable gifting, along with other itemized deductions, exceeds the standard deduction and the amounts are substantial enough over 2+ year spans. In effect, bunching 2 or more years of charitable gifts into a single year could trigger your ability to itemize and deduct those charitable contributions.
- For those over age 70½ and taking RMDs (required minimum distributions) consider making Qualified Charitable Distributions (QCDs) from your IRA before you take your RMD. If made directly to a qualified charitable organization those QCDs do not count as taxable distributions and count toward the RMD.
Health Savings Accounts, or HSAs, remain deductible and reduce taxable income.
Self-employed people may enjoy higher maximums for tax-deductible contributions to retirement plans like SEPs. Special rules apply to SEPs.
Major (and I mean MAJOR) gifts to family of personal or business assets: Back in 2018, the IRS raised the federal estate and gift tax limit to $11.1 million per person. Where this could apply to you is if you own a business that will be sold in the future and you could gift designated assets now to reduce future taxes to your estate.
- More down to earth, the annual gift exclusion amount is $15,000. Lots of people mistake these gifts as tax-deductible to the giver. They are not – and were not previously. The gift is tax-free to the recipient.
Taxes are rarely fun to think about. Yet taxes will always be part of a successful investment strategy. In considering strategies like these and others – ALWAYS run by your CPA or tax advisor – taxes can be managed and minimized over time.
*Consult your CPA or tax adviser for ALL tax advice.