2018 401k Contribution Limits

401k Contribution Limits in 2018

On October 19, 2017 the Internal Revenue Service announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2018. This news means the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan (TSP) is increased from $18,000 to $18,500. However, the catch-up contribution limit for those age 50 and over remains at $6,000. So if you are 50 or over, you may contribute up to $24,500 towards your 401(k) in 2018.

Roth IRA and Traditional IRA Contribution Limits in 2018

In 2018 both the Traditional IRA and Roth IRA contribution limits will remain flat at only $5,500 for those younger than age 50, and $6,500 for those who are 50 or older. That’s the same limit that’s been in place since 2013. From 2008 to 2012 the IRA contribution limit was $5,000.

2018 Traditional IRA and Roth IRA Eligibility

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the saver’s credit all increased for 2018.

2018 Traditional IRA Eligibility

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.)

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is $63,000 to $73,000, up from $62,000 to $72,000.
  • For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $101,000 to $121,000, up from $99,000 to $119,000.
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $189,000 and $199,000, up from $186,000 and $196,000.
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

2018 Roth IRA Eligibility

The income phase-out range for taxpayers making contributions to a Roth IRA in 2018 is $120,000 to $135,000 for singles and heads of household, up from $118,000 to $133,000 in 2017. For married couples filing jointly, the income phase-out range is $189,000 to $199,000, up from $186,000 to $196,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.




Health Savings Account (HSA) and Millennials

For the last two years (2015 and 2016) my wife and I were on a high-deductible health insurance plan (HDHP) through my employer. Our premiums were half the cost of a traditional plan and I received a quarterly contribution from my employer into a Health Savings Account (HSA). So not only was I paying half as much each month, but I was also getting a contribution from my employer just for being on the high-deductible plan. So essentially I was paying close to 60% less. It was great.

But then another great thing happened to us in our lives and we finally got our wish for a baby. We were expecting in early 2017, so we had time during my employers open enrollment process to explore both options (traditional health insurance versus high-deductible). We ended up taking the safer, more expensive route and went with traditional. We wanted to play it safe in case our baby, or my wife, experienced any complications during birth or even shortly after.

Our little baby is just now a few months old and is as healthy as you could possibly be. As is my wife. So all is well for us in hindsight, but we still feel we made the right decision by reverting to traditional, more expensive insurance with lower deductibles in case something catastrophic happened to mom or baby in year one.




Millennials Should Consider a Health Savings Account (HSA)

With that said, health insurance is expensive for everyone regardless of your plan options. No one likes their options nor do they like what they pay. It’s a huge problem for all of us. Health care costs are beyond exorbitant. They are absurd.

As it stands right now, my wife and I have every intention of going back to a high-deductible plan in 2018, along with our baby. I strongly encourage all of my Millennial readers to do the same thing. The premiums are significantly cheaper on a high-deductible health insurance plan (HDHP) and you get to contribute to a Health Savings Account (HSA). For 2017, the IRS defines an HDHP for an individual as a plan with an out-of-pocket maximum of $6,550 and a minimum deductible of $1,300. For a family plan in 2017, the out-of-pocket maximum is $13,100 and the minimum deductible is $2,600.

However, there is a huge tax advantage to those on a high-deductible health insurance plan (HDHP). The government will allow you to contribute $3,400 for an individual (in 2017) and $6,750 for a family (also in 2017); adults over 55 can add up to $1,000 more.

One of the greatest benefits of HSAs is they have three tax advantages. HSA contributions are pre-tax/tax-deductible, the money grows tax-free and the money can come out tax free. This means your contributions are made before your income is taxed, you don’t pay taxes on the account’s growth, and if you make withdrawals for eligible expenses, you don’t pay tax on that money then, either. That is triple tax advantage and you can’t beat it.

And if you and your family are healthy, you can invest that money via a brokerage account into the market and let it compound and grow. My goal is to invest and let it grow so I have my HAS at my disposal come retirement age for any and all qualified medical expenses.




Will a Roth IRA Ever Be Taxed?

Recently I have gone all-in on Roth retirement accounts due to the tax-free growth and tax-free withdraws. The latter is what intrigues me and virtually all financial advisors the most, which is the ability to live virtually tax-free in retirement. This should be all Millennial investors retirement goal, and not just because it is mine but because it is the prudent thing to do financially.

I opened this blog post by saying I have recently gone “all-in” on Roth retirement accounts and what I mean by that is currently I am only investing in a Roth. Hence my claim “all-in”. My employer offers a Roth 401(k) and I invest 15% on my income here. Previously I was splitting the difference and investing 5% in my traditional 401(k) and then 5% into the Roth 401(k). But in 2017 I decided to put it all into the Roth 401(k). My employer match goes into the traditional though, but that is fine and the only option.

I also max out a Roth IRA by contributing the limit, which is $5,500 per year. I also do this for my wife who is self-employed and has no retirement plan. After my company match, these Roth IRA accounts are the sole focus on our retirement investing. Then are amazingly flexible and offer tax-free growth and withdraws. You can even withdraw your contributions at any time, but not your earnings, penalty and tax free. I don’t treat my accounts this way, but in reality they are like pseudo- emergency savings accounts. A Roth IRA is a great investment vehicle for someone who wants to retire early, e.g. prior to age 59.5, because you can withdraw your contributions and begin retiring early on this.




Will Roth IRA Withdrawals Be Taxed in the Future?

But the big question is will a Roth IRA or Roth 401(k) one day be taxed by the government? The main reason I invest in Roth accounts is because I would rather pay the tax on my money now versus 25 plus years from now when it’s all but certain our taxes will be higher. If you look at tax rates historically, we are currently living in one of the lowest rates in the last century. On top of that, by the end of fiscal year 2017 the gross U.S. federal government debt is estimated to be $20.1 trillion. Let me repeat that…by the end of 2017 the U.S. federal government debt is projected to be $20.1 trillion!

Those numbers strongly lead you to believe that the government will be virtually forced to tax Roth retirement accounts, right? In my opinion the answer is a resounding no. Could the government do it though? Yes. But will they? No. The amount of backlash towards this decision would be devastating. Many respected financial minds agree with me, like Michael Kitches.

Fortunately, the reality is that while repealing tax-free Roth treatment is legally possible for Congress to do, it is politically unlikely. Not just because it would be immensely unpopular with active senior voters, but also because eliminating Roth treatment actually scores very poorly in Federal revenue projections, due to the 10-year budgeting process that is typically used to analyze major tax law changes.




U.S. Taxes Will Increase Substantially

What do I think congress will do instead? Well the fact that the U.S. government is expected to be 20.1 trillion dollars in debt by the end of 2017 should tell everyone that taxes will one day increase substantially. Donald Trump and the current administration are in the process of lowering the tax rates on individuals and businesses. This is all well and good short-term, paying less taxes, but big-picture it just doesn’t seem sustainable with the amount of debt our government is in.

If all goes well with my finances and retirement planning, I hope to retire approximately around the year 2040. I find it hard to believe that my tax bracket in 20-plus years is going to be lower than it is right now with this amount of debt on government is in. Just think about it…eventually congress is going to have to pass a bill to increase tax rates on all of us. And if you have all your retirement money tied up in traditional IRA and 401(k) plans, your retirement nest egg is going to take a huge hit. How bad could it get? What if your income was to be taxed at 35% or 45% on withdraws? What would that do to your retirement lifestyle?

Roth IRA’s and Roth 401(k)’s Are for Millennial Investors

I really want to stress to all Millennial investors that Roth IRA’s and Roth 401(k)’s (if available) are the right retirement vehicle for you now and long term. Going after Roth accounts and taxing these is not where the money is. Increasing tax rates on all of American’s, especially the affluent, is where the government will make up ground on their huge deficit. Millennial’s should be safe and sound by investing in Roth IRA and Roth 401(k) accounts for their retirement.




2017 Tax Brackets

Each year the IRS adjusts all tax provisions for inflation, which helps prevent what is called “bracket creep.” This is the idea by which people are pushed into higher income tax brackets or have reduced value from credits or deductions due to inflation, instead of any increase in true income.

Estimated Income Tax Brackets and Rates

In 2017, the income limits for all brackets and all filers will be adjusted for inflation. The top marginal income tax rate of 39.6 percent will hit taxpayers with taxable income of $418,400 and higher for single filers and $470,700 and higher for married couples filing jointly.

2017 Single Taxable Income Brackets and Rates

2017 Single Taxable Income Brackets and Rates
2017 Single Taxable Income Brackets and Rates

2017 Married Filing Joint Taxable Income Brackets and Rates

2017 Married Filing Joint Taxable Income Brackets and Rates
2017 Married Filing Joint Taxable Income Brackets and Rates

2017 Head of Household Taxable Income Brackets and Rates

2017 Head of Household Taxable Income Brackets and Rates
2017 Head of Household Taxable Income Brackets and Rates


What will Donald Trump do for the stock market?

It has been one week since Donald Trump became our 45 president elect. Unless you have had your head in the sand for the last year, you know how controversial this election has been. Especially now after Donald Trump’s historic upset over Hillary Clinton.

I’ve stated before on this blog that I am fairly moderate. I am rather conservative economically (less government, low taxes, pro small business) and quite progressive socially (more gun control, gay marriage, marijuana legalization for tax revenue, pro choice). I truly believe a lot of Americans feel this way and are squarely in the middle of politics as “moderate”.

However, roughly 50% of the country woke up last Wednesday on November 9th to a president they are severely disappointed with. Well, regardless of where you stand, what’s done is done and its time for us all to look ahead to four years with Donald Trump as our president of the United States of America.

What comes next for the markets after Donald Trump’s win

Did you know the market dropped $1 trillion Tuesday night during the election as it became more and more clear Donald Trump was going to be our 45th president elect? However, less than 24 hours later on Wednesday, the markets closed by being up $1.3 trillion. Meaning the market capitalization Wednesday once we knew Trump was elected actually gained $3 billion.

Regardless of your political affiliation, the one thing we can all agree on is a thriving economy with excellent job creation, as well as a thriving stock market. It obviously remains to be seen what exactly Trump can and will do with our economy and stock market. I’ve read a ton of articles over the last few days and the consensus seems split (shocking, huh?). A number of both financial pundits and economists sees pros and cons to Trumps overall plans.

The one thing I can say with absolute certainty, and I know every sane financial planner and economist would agree with me on, is to continue investing. NOT investing because you don’t like the president is a really uneducated, emotional reaction you will strongly regret later in life. This type of conjecture is out there every time we have a new president and half the country is disappointed and expecting the worse. Not the case.

Donald Trump does not dictate your personal success or financial well being. You can become wealthy under any party in control at the White House. You can also go dead-broke and be in debt up to your eyeballs with any president.

Let’s say those who vehemently oppose Trump are right (Democrats and many Republicans do) and he turns into an abject disaster. Without saying that is really bad for the short term, but long term (investing-wise) it would be a market correction. If you keep investing during a “bad” market over the Trump term then you essentially get to buy more funds on sale.

I once read in a finance book where Warren Buffett was quoted as saying you actually want a down market to buy stocks at cheaper prices. If you invest regularly, you want to buy them at a good value, not at their highest each and every time. He liken it to someone who eats meat every day…you do not want meat prices to keep rising do you? Same goes for those who buy into the stock market regularly.

What to do now that Trump will be President?

All I want to stress to my readers is to live below your means. Spend well less than you make. Save substantially more than what feels comfortable (at least 15%, if not much more). Try not to compare yourself to others and keep up with the Jones. Invest regularly into diversified index funds for the long haul. And repeat.

You control your own financial independence. Not Donald Trump, not Hillary Clinton, not the government. Its time to move on and take matters into your own hands. Please, please, please keep investing into the stock market. This is your only way to get wealthy but it will take time…like another 3-5 presidents actually. So don’t let this one (Trump) get you down. Keep on keeping on and invest.

Education Tax Credits Help You Pay for College

By Warrior Accounting and Consulting Services

Are you planning to pay for college in 2016? If so, money you paid for higher education can mean tax savings on your tax return when you file next year. If you, your spouse or your dependent took post-high school coursework last year, you may be able to take advantage of education credits that can help you with the cost of higher education. Taking advantage of these education tax credits can mean tax savings on your federal tax return by reducing the amount of tax you owe. Here are some important facts you should know about education tax credits.

American Opportunity Tax Credit:

  • You may be able to claim up to $2,500 per eligible student.
  • The credit applies to the first four years at an eligible college or vocational school.
  • It reduces the amount of tax you owe. If the credit reduces your tax to less than zero, you may receive up to $1,000 as a refund.
  • It is available for students earning a degree or other recognized credential.
  • The credit applies to students going to school at least half-time for at least one academic period that started during the tax year.
  • Costs that apply to the credit include the cost of tuition, books and required fees and supplies.

Lifetime Learning Credit:

  • The credit is limited to $2,000 per tax return, per year.
  • The credit applies to all years of higher education. This includes classes for learning or improving job skills.
  • The credit is limited to the amount of your taxes.
  • Costs that apply to the credit include the cost of tuition, required fees, books, supplies and equipment that you must buy from the school.

The Tuition and Fees Deduction is:

  • Claimed as an adjustment to income.
  • Claimed whether or not you itemize.
  • Limited to tuition and certain related expenses required for enrollment or attendance at eligible schools.
  • Worth up to $4,000.

The following applies to all three credits and deductions as well:

  • The credits apply to an eligible student. Eligible students include you, your spouse or a dependent that you list on your tax return.
  • You must file Form 1040A or Form 1040 and complete Form 8863, Education Credits, to claim these credits on your tax return.
  • Your school should give you a Form 1098-T, Tuition Statement, by February 1, 2017, showing expenses for the year. This form contains helpful information needed to complete Form 8863. The amounts shown in Boxes 1 and 2 of the form may be different than what you actually paid. For example, the form may not include the cost of books that qualify for the credit.
  • You can’t claim either credit if someone else claims you as a dependent.
  • You can’t claim either AOTC or LLC and the Tuition and Fees Deduction for the same student or for the same expense, in the same year.
  • The credits are subject to income limits that could reduce the amount you can claim on your return.
  • Use the Interactive Tax Assistant tool at IRS.gov to see if you’re eligible to claim these education tax credits.

Even if you can’t take advantage of any of these tax credits, there could be other education-related tax benefits that you can claim.

By Warrior Accounting and Consulting Services

7 ways Millennials can get a jump-start on retirement planning

By Jeff Reeves / USA TODAY Money

It’s quite fashionable these days to moralize about the shortcomings of the entire Millennial generation. And the latest fodder for critics is a recent survey by finance site HowMuch.net that shows more than 50% of those ages 18 to 34 have less than $1,000 in savings.

But before you wag a finger at those young whippersnappers, keep in mind the hard reality is that Americans of every age stink at saving. According to finance portal Go Banking Rates, 62% of all Americans have less than $1,000 saved.

But rather than debate which generation is worse with money, it’s much more helpful to think about how to build up your savings and make sure you’re one of those in the minority who are actually prepared.

And the good news for Millennials is that, with time on their side, there are a few very simple but powerful ways to ensure they have a nice nest egg come retirement. Here are seven:

• Pay yourself first. “The best piece of advice I always give people to start is to save early and save often,” says Jamie Hopkins, retirement income program co-director at The American College of Financial Services. That means making savings a budget priority, socking away that cash before it goes to any other expenses —– including your regular bills. A responsible budget with built-in savings instills discipline and prevents the temptation of dipping into your nest egg for discretionary purposes, Hopkins said, but even spendthrifts know better than to miss rent or a car payment because of a trip to the mall.

• Put your money to work. Saving alone probably isn’t enough for most Millennials to retire comfortably, says Bill Liatsis, CEO and co-founder of lending and finance site CreditIQ. That means getting over hang-ups about risks in the stock market. “There probably hasn’t been a generation that trusts investments and the market less than Millennials, but if they want to retire one day, at some point you have to be exposed to the leverage of U.S. GDP,” he says. “That’s what has carried every other generation through to retirement.”

• Get every penny of your 401(k) match. If your employer offers some kind of matching funds to 401(k) contributions, “Don’t leave free money on the table,” Hopkins says. Make sure you’re taking full advantage of any match.

• Consider a Roth IRA. After you’ve gotten the most out of your 401(k) match, Hopkins recommends any additional savings be diverted into a Roth IRA. That’s because the money in a 401(k) doesn’t have any taxes incurred on it until you withdraw the funds, while taxes on Roth IRA contributions are paid upfront. Unless you’re lucky enough to be making a plush salary right out of college, chances are the tax bracket you’re in during your 20s will be lower than the rate you’ll incur later, Hopkins says. That ultimately means less of your nest egg goes to the IRS come retirement.

• Keep investments simple. After you set up your 401(k) or a Roth IRA, you might be confused or even intimidated by all the investment options out there. But don’t be. Because Millennials have some 30 years until retirement, a lot of the day-to-day volatility of the stock market will be a non-factor, says Scott Bishop, director of financial planning at STA Wealth. “Just pick one balanced fund or a target-date fund instead of picking eight mutual funds and trying to chase returns,” he says. After all, since the Depression there has never been a single period of 20 consecutive years where the stock market hasn’t gone up in value. Be patient, and keep it simple, Bishop advises.

• Think beyond savings. A crucial part of retirement planning involves thinking about financial security for you and your family should the unexpected happen, Bishop says. That involves disability insurance, life insurance and health insurance. “Don’t skimp or go naked without insurance just to save a couple of bucks,” Bishop says.

• Be wary of advice from peers or parents. Many Millennials don’t trust financial advisers in the wake of the financial crisis, Bishop says. But that could be a big mistake if they take advice from inexperienced peers or their parents instead. “The problem with these folks, who are probably really well-intentioned, is that they’re inexperienced,” he says. This can be particularly troublesome, Bishop says, considering many Millennials have parents who never held student loans and have a pension plan in retirement — two major differences that make their retirement planning quite different.

By Jeff Reeves / USA TODAY Money

Good news for 529 investors

By Vanguard

Withdrawals and contributions just got a little easier for 529 investors. In December 2015, the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) was signed into law. It includes the following changes, which are retroactive to the beginning of 2015.

Computer-related expenses are covered

You can now withdraw money from a 529 plan to pay for computer-related expenses. (Previously, 529 rules treated computers as qualified expenses only if a school required them as a condition of enrollment.)

Under the new law, computers—along with computer hardware, equipment (printers, software, etc.), and internet access and related services—are always considered qualified higher education expenses, as long as the beneficiary is the primary user while enrolled at an eligible school.

Now available: The option to re-contribute

Before the new law, an account owner who withdrew money from a 529 plan, paid for an eligible expense, and then received a refund for that expense would have to treat the withdrawal as non-qualified, which resulted in income inclusion (additional taxable income that needs to be reported) and penalties.

But now, account owners have the option to recontribute the refunded money to any 529 plan for the same beneficiary and avoid any taxes or penalties (as long as they recontribute within 60 days of receiving the refund). For example, if you take a withdrawal to pay for a class—and the student withdraws from that class—and you receive a refund, you can recontribute the amount you originally withdrew without tax or penalty.

You don’t need to report the recontribution on your tax return, but keep details on any refunds and recontributions for your records.

Change to the potential “cost” of a non-qualified distribution

Own multiple accounts for the same student? Previously, if you took a non-qualified withdrawal from one of the accounts, the contributions and account values for all of your accounts would be combined to calculate the earnings portion of the non-qualified distribution. (Earnings on non-qualified withdrawals are subject to federal and possibly state income tax and a 10% penalty.)

Going forward, you can calculate the earnings portion of a non-qualified distribution on an account-by-account basis, using the contribution history and account value of the 529 account from which you took the withdrawal. And if you identify the 529 plan with the least amount of earnings before you take a withdrawal, you can take the money from that plan, reducing the amount of taxes and penalties you may be assessed.

By Vanguard