Each year, the IRS makes cost-of-living adjustments (or COLAs) to dollar limitations that apply to qualified retirement accounts and Social Security. With the new year right around the corner, now is a good time to review these adjustments for 2018 and assess their potential impact on your financial plans.
COLAs Affecting Retirement Accounts
If you participate in a 401(k), 403(b) or 457 retirement plan, you will be able to sock away a little bit more money for retirement next year. The annual contribution limit for these plans will increase by $500 in 2018 to $18,500, or $24,500 if you’re age 50 or over.
However, the annual contribution limit for Individual Retirement Accounts (IRAs) is not going up next year. It will remain unchanged at $5,500, or $6,500 if you’re age 50 or over.
But there is some good news when it comes to IRA contributions next year. The income phase-out range for determining whether or not you can deduct contributions to traditional IRAs if you or your spouse is covered by a workplace retirement plan is going up as follows:
- For single taxpayers covered by a workplace retirement plan, the range is rising from $62,000-$72,000 to $63,000-$73,000.
- For married couples filing jointly where the spouse making the contribution is covered by a workplace retirement plan, the range is rising from $99,000-$119,000 to $101,000-$121,000.
- For married couples filing jointly where the spouse making the contribution is married to someone who covered by a workplace retirement plan, the range is rising from $186,000-$196,000 to $189,000-$199,000.
Eligibility to make contributions to a Roth IRA phases out at certain income levels. These income phase-outs are going up next year as follows:
- For single taxpayers and heads of households, the range is rising from $118,00-$133,000 to $120,000-$135,000.
- For married couples filing jointly, the range is rising from $186,000-$196,000 to $189,000-$199,000.
The income limits for claiming the Retirement Savings Contribution Credit (also known as the Savers Credit) are also going up next year as follows:
- For single taxpayers, the income limit is rising from $31,000 to $31,500.
- For heads of households, the income limit is rising from $46,500 to $47,250.
- For married couples filing jointly, the income limit is rising from $62,000 to $63,000.
The limit on the total annual benefit you can receive from a defined benefit pension plan next year is rising from $215,000 to $220,000. And the limit on the total annual benefit you can receive from defined contribution plans next year is rising from $54,000 to $55,000.
COLAs Affecting Social Security
If you receive Social Security or Supplemental Security Income (SSI) benefits, your benefit amount will increase 2% in 2018. The maximum Social Security benefit you can receive if you retire at your full retirement age is rising from $2,687 to $2,788 next year.
Meanwhile, if you are still paying into Social Security and Medicare, your tax rates will remain the same next year: 6.2% for Social Security (up to a maximum level of taxable earnings) and 1.45% for Medicare, for a combined rate of 7.65%. Note, however, that the maximum level of taxable earnings to which Social Security (but not Medicare) taxes apply is rising from $127,200 to $128,400.
Also note that if you’re self-employed, these tax rates double to 12.4% and 2.9%. This is because employers pay half of Social Security and Medicare taxes for their employees — but if you’re self-employed, you are the employer and must pay the full amount yourself. In this case, the tax is referred to as the self-employment tax.
Please contact us if you have more questions about these annual cost-of-living adjustments and how they could impact your personal finances.
