Save Now While Saving for Later: Retirement Funds and Year-End Tax Planning

The new tax law did not change the rules regarding retirement plan contributions and their limits. Taxpayers can still lower their taxable income by making contributions to their retirement savings plans before year-end.

The Employee Benefit Research Institute’s 2018 Retirement Confidence Survey indicates that only 32% of retirees are “very confident” in their ability to live comfortably throughout their retirement. It is clear that most people can’t expect to be financially secure during their senior years without putting some money away in a personal IRA or work-sponsored 401(k) retirement plan.

You don’t have to wait, however, to enjoy some of the benefits of the money you are putting away. When you contribute to a qualified retirement plan, you can also get a significant tax break – right now!

A very brief history of the retirement contribution deduction

Since the enactment of The Employee Retirement Income Security Act (ERISA) in 1974, Congress has encouraged Americans to plan for their retirement by granting tax deductions for certain IRA contributions. 401(k) plans allowing companies to defer bonuses and stock options were introduced in the Revenue Act of 1978, which came into effect in 1980. In 1981, employees gained the ability to contribute to their company 401(k) plans through salary deductions, and the 401(k) quickly became a popular retirement vehicle.

Although The Tax Cuts and Jobs Act of 2017 (TCJA) made some significant changes to the tax code, it did not change the rules regarding retirement plan contributions and their limits. Taxpayers can still lower their taxable income by making contributions to their retirement savings plans before the end of the year.

401(k) contribution limits (2018)

In 2018, you can contribute up to $18,500 of your pretax income to a traditional or safe harbor 401(k) plan, and those over 50 can add an additional $6,000 to that sum as a “catch-up contribution.” For simple 401(k) retirement plans, the maximum contribution available for tax referral is $12,500.

You can pay into multiple 401(k) plans, but the total cannot be over the yearly contribution limit. For an additional tax deduction and greater retirement savings, consider opening a traditional IRA.

IRA contribution limits (2018)

While 401(k) contributions are limited to employees of companies that offer them, IRAs are open to everyone. The tax deduction for IRAs depends on three factors:

  1. The type of IRA you are contributing to,
  2. Whether or not you also participate in an employer-sponsored retirement plan, and
  3. Your income level

The maximum contribution limit for both traditional and Roth IRAs are currently $5,500 ($6,500 if you are 50 or over), but you cannot take a tax deduction for a contribution to a Roth IRA.  The following chart outlines the tax deduction for traditional IRAs:

  Individual / Head of Household Income Level Married Filing Jointly
Income Level
Married Filing Separately
Income Level
With 401(k) Non-active participant spouse (spouse earns no income)
Full deduction $63,000 or less $101,000 or less Under $189,000 N/A
Partial deduction $63,001 – $72,999 $101,001 – $120,999 $189,000 -$198,999 Less than $10,000
No deduction $73,000 and over $121,000 and over $199,000 and over $10,000 and over

Even if you can’t deduct the full amount of your contributions, you can still contribute to your IRA each year at that level. Any contribution over the maximum deductible amount, however, will be contributed with after-tax rather than pre-tax dollars.

Using the retirement plan contribution deduction on a previous year’s return

Note that in some circumstances, you can pay into your retirement plan in one year and deduct it as a contribution for the previous year. To do this, you must make the contribution before the extended due date for that year’s tax return (October 15th). Although it’s too late to take a 2017 deduction for a contribution made this year, you should keep this rule in mind as you plan your 2018 year-end payments.

When you pay tax on your retirement savings

When you start taking withdrawals during your retirement, you will need to pay the taxes that you didn’t pay when you put the money in your IRA. If you withdraw any money from these accounts before you reach the age of 59 ½, you’ll have to pay a 10% early withdrawal IRS penalty in addition to your income tax.

San Francisco tax planning services

The attorneys and accountants at Moskowitz LLP have extensive experience preparing both routine and complex tax filings at the federal, state and local levels. Part of this work is providing tax planning services for individuals and businesses, including providing guidance on how to maximize both company and individual retirement plans. To learn more about how you may be able to lower your 2018 tax bill through retirement planning, contact our San Francisco office immediately.