What You Need to Know About Retirement Contribution Limits

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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.

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)

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