Higher Retirement Plan Contributions In 2019
One of the best retirement tools I recommend in tax-smart investing is to make the maximum use of retirement plans for funds that can be used for long-term growth for hopefully many years in retirement.
For those folks lucky enough to be able to fund to the maximums the good news is the higher contribution limits for 2019:
IRA's after six years of being stuck at $5500, the limit has been pushed up to $6000 for 2019 due to the latest cost of living adjustment. However, the over age 50 "catch up" remains at $1000 for a total of $7000 allowed. Deductions for these contributions are subject to income phase-out ranges, depending on your earnings and if you have access to a workplace retirement program.
If you are eligible, especially for self-employed's I recommend Solo K's - aka Individual K - which we can set up for you. I have one myself since so much easier than a regular 401K plan with low costs and no reporting requirements unless over $250,000 and then a rather easy Form 5500SF (short form) is required. There are no complicated rules about compliance testing, etc. as in regular 401K's. When I established my plan years ago, I rolled over by direct transfer my prior IRA into the Solo 401K.
You can also use for LLC's, corporations, or other entities as long as you have no employees other than a spouse. However, you can set up the plan so you can have part-time workers with less than 1000 hours of work and one year of service.
You have until the extended due date of your return to contribute. I usually extend until October 15th so I can delay deciding to fund more for the prior year or not. However, you have to have had the plan open by 12/31 of the year you wish to contribute for.
There are two types of contributions available for Solo K accounts:
1) Elective Employee Contribution up to 100% of earnings: For 2019 the maximum is up to $19,000 vs. $18,500 in 2018. If age 50+ increase to $25,000 vs $24,500 in 2018. This is also limited to 100% of your net income from self-employment on Schedule C, if self-employed.
2) If you wish to contribute more than the amount above, you can make employer contributions up to 25% of wages, or for self-employed, it is a bit more difficult - net earnings on Schedule C after deduction for one-half of self-employment tax and contributions for yourself. The limit on earnings used for the calculation is $280,000 in 2019 vs. $275,000 in 2018.
The combined overall limit is $56,000 in 2019 vs. $55,000 in 2018. If age 50+ limit is $62,000 vs. $61,000 in 2018
If a business owner’s spouse earns income from the business and becomes eligible to participate in the plan, they may also contribute up to the annual limits.
Lower Income Saver's Credit
Low and moderate income retirement savers can earn between $500 and $1000 more and still qualify for the saver's credit. This tax credit is worth between 10 and 50 percent of 401(k) and IRA contributions up to $2,000 for individuals and $4,000 for couples. The income limit for the saver's credit will increase to $32,000 for individuals and $64,000 for married couples in 2019. Retirement savers with the lowest incomes are eligible for the biggest tax credit, which could be worth as much as $1,000 for individuals and $2,000 for couples. The saver's credit can be claimed in addition to the tax deduction for saving in a traditional retirement account.
There are similarly increased limits on Roth, SEP, SIMPLE, SARSEP, SEP, 403b, 457b, and other retirement plans.
The bad news - Social Security Wage Base
The social security (or self-employment) tax base increased by $4000 ($128,000 to $132,000). This is a regressive tax since only on the first $132,000 of compensation. The Social Security tax rate remains unchanged at 6.2% for the employer and 6.2% for the employee. For us that are self-employed, we pay both (12.4% total).
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