Tax Reform Changes To Recharacterizations And Roth IRA 2018 Contribution Limits

Despite lots of noise leading up to the passage of the tax reform bill, retirement planning was left mostly alone. While the tax cuts and changes might have a big impact on government program cuts to Medicare, Medicaid, and Social Security in the future and might also significantly impact how people save, spend, and invest money, only a few direct changes were made to retirement planning laws. The two main changes were to loan repayments to qualified plans and Roth IRAs. A small change was made to allow for a slightly longer period of time to pay back a loan from a qualified plan (i.e. 401(k) plan) after separation of service, which could provide a bit of relief in some situations to those with outstanding retirement plan loans. The second change, removing the ability to recharacterize Roth IRA conversions, while still relatively insignificant from a tax revenue standpoint, could have a bigger impact on financial planning.

In essence, there are three ways to get money into a Roth IRA. First, you can make annual contributions to the Roth IRA. For 2017 and 2018, the total contributions you can make to traditional IRAs and Roth IRAs cannot be more than $5,500 if you are under age 50 and $6,500 if you are age 50 or older. Additionally, you cannot contribute more than your taxable compensation for a year. So, if you only earn $4,000 in 2017, you cannot put more than $4,000 into an account. However, this is an exception for the compensation limit if you file a joint tax return. If your spouse had enough taxable compensation, you can still contribute to a Roth IRA as long as the combined contributions for both spouses are not more than the taxable compensation listed on the joint tax return.

You can contribute to a Roth IRA for the previous year up until your tax return date. As such, you can still contribute to a Roth IRA for 2017 up until Tuesday, April 17, 2018 (the tax filing deadline for a 2017 return). You can also contribute to a Roth IRA for 2018 any time in 2018 and up to the tax return date in 2019. However, Roth IRA contributions are phased out if you earn too much money. In 2018, for single filers, your ability to contribute to a Roth phases out once you hit $120,000, and completely maxes out at the $135,000 level. For those married and filing jointly, the phase-out range for Roth IRA contributions is $189,000 to $199,000. The income limits in 2017 were slightly lower: $186,000 to $196,000 for married filing jointly and $118,000 to $133,000 for single filers.

In addition to contributing directly to a Roth IRA, money can be rolled over from a Roth account into a 401(k) or 403(b) plan. There is no limitation as to how much can be rolled over from a 401(k) or 403(b) Roth account to a Roth IRA in a given year. However, there are other limitations that could apply inside the plan that could limit your ability to roll over money while still working as many plans do not allow for in-service distributions.