If you’re 50 or older and still working, taking advantage of “catch-up” contributions to your retirement plan could be particularly advantageous if your itemized deductions for 2018 will be smaller than in the past due to changes under the Tax Cuts and Jobs Act (TCJA). The additional contributions can reduce your taxable income and help make up for the loss of some of your itemized deductions.
Catch-up contributions are additional contributions beyond the regular annual limits that can be made to certain retirement accounts. They were designed to help taxpayers who did not save much for retirement earlier in their careers “catch up” as they approach retirement.
Catch-up contributions can be a great option for anyone who is age 50 or older on Dec. 31, has been maxing out their regular contribution limit, and has sufficient earned income to contribute more to their retirement plan. The contributions are generally pretax (except in the case of Roth accounts), so they can reduce your taxable income for the year. You can begin catch-up contributions as early as Jan. 1 of the year you turn 50.
More benefits now?
This additional reduction to taxable income might be especially beneficial in 2018 if in the past you had significant itemized deductions that now will be reduced or eliminated by the TCJA. For example, the TCJA eliminates miscellaneous itemized deductions subject to the 2 percent of adjusted gross income floor ― such as unreimbursed employee expenses (including home office expenses) and certain professional and investment fees.
If, say, in 2018 you have $5,000 of expenses that in the past would have qualified as miscellaneous itemized deductions, an additional $5,000 catch-up contribution can make up for the loss of those deductions. Plus, you benefit from adding to your retirement nest egg and potential tax-deferred growth.
Other deductions that are reduced or eliminated by the TCJA include state and local taxes, mortgage and home equity interest expenses, casualty and theft losses, and moving expenses. If these changes affect you, catch-up contributions can help make up for some of your reduced deductions.
2018 contribution limits
Under 2018 401(k) limits, if you are age 50 or older and you have reached the $18,500 maximum contribution limit, you can contribute an extra $6,000, for a total of $24,500. If your employer offers a SIMPLE instead, your regular contribution maxes out at $12,500 in 2018. If you are 50 or older, you’re allowed to contribute an additional $3,000 ― or $15,500 in total for the 2018 year.
But, check with your employer because, while most 401(k) plans and SIMPLEs offer catch-up contributions, not all do. Also keep in mind that additional rules and limits may apply.
The deadline to make catch-up contributions to 401(k) and SIMPLE retirement plans for 2018 is by Dec. 31.
Additional options for the 2018 tax year
Catch-up contributions are also available for IRAs, but the deadline for 2018 IRA contributions is later: April 15, 2019. Whether your traditional IRA contributions will be deductible depends on your income and whether you or your spouse participates in an employer-sponsored retirement plan.
2019 contribution limits
If you can’t fund a catch-up contribution by the end of 2018, you are just in time to prepare for 2019 since catch-up contributions can be funded throughout the year. Under 2019 401(k) limits, if you are age 50 or older and you have reached the $19,000 maximum limit for all employees, you can contribute an extra $6,000, for a total of $25,000. If your employer offers a SIMPLE instead, your regular contribution maxes out at $13,000 in 2019. If you are 50 or older, you can contribute an additional $3,000 ― or $16,000 in total for the 2019 year.
Again, check with your employer to see if catch-up contributions are offered by your plan.
For more information about catch-up contributions and other year-end tax planning strategies, or if you have questions about retirement account regulations, please contact a KraftCPAs representative. We’ll be glad to assist you.