What You Need to Know About Retirement Contribution Limits

Saving more tax-free dollars for retirement got easier in 2019 after a six-year wait! The inflation-adjusted maximum annual contri­bution for a Roth IRA finally increased to $6,000. Catch-up contri­bution limits for taxpayers age 50 or older remain unchanged at $1,000. There is no age limit on making a Roth IRA contri­bution. However, the taxpayer must have at least $6,000 of earned income ($7,000 for age 50 or older). If you make less than $6,000, the maximum contri­bution is capped at total earnings.

The tax code does not restrict Roth contri­bu­tions by age, but it does contain restric­tions based on income. Taxpayers can make direct contri­bu­tions to a Roth IRA until their adjusted gross income (AGI) is $193,000 to $203,000 for married couples filing jointly, in 2019. For singles and heads of household, the income phase-out range is $122,000 to $137,000.

Tradi­tional IRAs do not have a contri­bution cap based on earnings, only on the ability to make pre-tax contri­bu­tions. In 2019, taxpayers can make tax deductible contri­bu­tions to a tradi­tional IRA until AGI exceeds $103,000 to $123,000 for couples and $64,000 to $74,000 for singles. This limitation only applies to taxpayers who are covered by a workplace retirement plan.

For joint filers where only one spouse is covered by a plan, the phaseout zone for deducting a contri­bution for the uncovered spouse will start at $193,000 of AGI and end at $203,000. The taxpayer can still contribute to a tradi­tional IRA if income exceeds these limits; however, the contri­bution will not be deductible.

Converting Non-Deductible IRA Contributions to Roth IRAs

Taxpayers with higher income could make non-deductible IRA contri­bu­tions and then simply convert them to Roth IRAs since there is no longer an income limitation on conver­sions. This technique had been considered a gray area because the tax code had not specif­i­cally said it was permitted. Some advisers were concerned the IRS could consider it a step-transaction and conver­sions would be reversed and subjected to penalties. Under the step trans­action doctrine, “a series of trans­ac­tions designed and executed as parts of a unitary plan to achieve an intended result … will be viewed as a whole regardless of whether the effect of so doing is imposition of or relief from taxation¹.”

The Conference Committee’s Explanatory Statement of the Tax Cut and Jobs Act (TCJA) of 2017 finally moved this technique out of the gray area. The Conference Committee confirmed contri­bu­tions first made to a tradi­tional IRA as non-deductible can then be converted to a Roth IRA. This trans­action is legal under both prior law and TCJA.

“Although an individual with AGI exceeding certain limits is not permitted to make a contri­bution directly to a Roth IRA, the individual can make a contri­bution to a tradi­tional IRA and convert the tradi­tional IRA to a Roth IRA.…”

Consideration #1: Pro-Rata Rule

There are still a couple of points to consider before using this technique. All pre-tax contri­bu­tions made to an IRA plus earnings are considered pre-tax and become taxable when converted to a Roth IRA. How the IRS accounts for after-tax and pre-tax funds in an IRA when the taxpayer is doing a partial Roth conversion is referred to as the pro-rata rule². A taxpayer who has pre-tax money in existing IRAs will need to consider the tax impact of using this technique.

Consideration #2: Non-Deductible Contributions

A second consid­er­ation applies to taxpayers once they reach age 70 ½. They can make Roth contri­bu­tions and convert an IRA to a Roth; however, they cannot make a non-deductible contri­bution to an IRA, even if they have earned income. If their income is too high to make a Roth contri­bution directly, they will not be able to get around the limitation due to their age.

Taxpayers working for an employer with a 401(k) that allows after-tax contri­bu­tions can rollover their after-tax funds directly to a Roth IRA at retirement. The pre-tax limit for contri­bution increased in 2019 to $19,000 plus an additional $6,000 catch-up for those age 50 or older. The annual additions limit was increased to $56,000 for defined contri­bution plans. Total pre-tax and after-tax contri­bu­tions cannot exceed this amount in 2019.

Additional Contribution Changes in 2019

Self-employed and small business owners who use either a SEP IRA or a solo 401(k) can contribute up to $56,000 in 2019. This total is reached using an amount that can be contributed as an employer using the compen­sation limit of $280,000 in 2019. The limit on SIMPLE retirement accounts went up to $13,000 in 2019. The SIMPLE catch-up limit stayed at $3,000.

The income limit for the saver’s credit for low- and moderate-income workers is $64,000 for married couples filing jointly for 2019, $48,000 for heads of household, and $32,000 for singles and married filing separately.

Rick’s Tips:

• In 2019, the maximum annual contri­bution for a Roth IRA is $6,000.
• Taxpayers age 50 or older can also make catch-up contri­bu­tions of $1,000.
• Taxpayers age 70 ½ or older cannot make tradi­tional IRA contri­bu­tions but could make Roth IRA contri­bu­tions if they have earned income.

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¹Internal Revenue Service Memorandum Number: 200826004, Release Date: 6/27/2008

²Also referred to as the IRA Aggre­gation Rule under IRC Section 408(d)(2)