Are you still working? Will you be age 50 or older by December 31? Are you already contributing up to the regular annual limit to your 401(k) plan or Savings Incentive Match Plan for Employees (SIMPLE)? If so, then you may want to make “catch-up” contributions by the end of the year. Changes under the Tax Cuts and Jobs Act (TCJA) can make increasing your retirement plan contributions particularly advantageous if your itemized deductions for 2018 will be less than in the past.
Catch-up contributions are further contributions beyond the regular annual limits that can be made to certain retirement accounts. They are designed to help taxpayers who did not save much for retirement earlier in their careers to “catch-up.” However, no rule limits catch-up contributions to such taxpayers.
So catch-up contributions can be an excellent option for anyone who is old enough to be eligible, has sufficient earned income to contribute more and has been maxing out their regular contribution limit. Except for Roth accounts, the contributions are generally pretax, so they can reduce your taxable income for the year.
More benefits now?
This added reduction to taxable income may be especially beneficial in 2018 if in the past you had significant itemized deductions that will now be eliminated or reduced by the TCJA. For instance, the TCJA eliminates miscellaneous itemized deductions subject to the 2% of adjusted gross income floor—such as unreimbursed employee expenses (including home-off expenses) and certain professional and investment fees.
If, let’s say, in 2018 you have $5,000 of expenses that in the past would have qualified as miscellaneous itemized deductions, another $5,000 catch-up contribution can make up for the loss of those deductions. Also, you benefit from adding to your retirement nest egg and potential tax-deferred growth.
Other deductions that are eliminated or reduced include mortgage and home equity interest expenses, casualty and theft losses, state and local taxes, and moving expenses. If you are affected by these changes, catch-up contributions can help make up for reduced deductions.
2018 contribution limits
If you are old enough to be eligible and you have reached the $18,500 max for all employees, you can contribute another $6,000, for a total of $24,500 under 2018 401(k) limits. Your regular contribution will max out at $12,500 in 2018 if your employer offers a SIMPLE instead. If you are old enough to be eligible, you are allowed to contribute an additional $3,000—or $15,500 in total for the year.
However, check with your employer because, while most SIMPLEs and 401(k) plans offer catch-up contributions, not all do. Also, consider that additional rules and limits apply.
Catch-up contributions are also available for IRAs, but the deadline for 2018 contributions is April 15, 2019. Also, whether your traditional IRA contributions will be deductible depends on whether you or your spouse participates in an employer-sponsored retirement plan and depends on your income. For more about catch-up contributions and other year-end tax planning strategies contact us.
Ben R Shull CPA LLC provides clients with tax, transaction, and advisory services. The insights and quality services we deliver help lead our clients through the next generation of changes, and accelerate growth while reducing risk. CPA Katy, TX.