• Time running out to contribute to IRA, 401(k)

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  • Rodney S. Morris | Special to the Fort Leavenworth Lamp
    The opportunity is fading to contribute to last year’s Individual Retirement Arrangement, most widely understood as an Individual Retirement Account. Many of us either have not had the time to think about it, or simply chose not to think about it because there are too many more immediate tasks at hand, or maybe we just didn’t have the funds to do so. Month after month goes by and before you know it, the new year is upon us.
    There is good news for us in this category because the laws allow for us to procrastinate with our IRAs and still make a full contribution for 2018 until April 15. Then the laws abruptly take that good news away.
    401(k) plans work the same way; April 15 is the deadline for a 2018 contribution. You cannot open a new 401(k) for this year and deposit into it for 2018, it must have been already established. Unfortunately, the Thrift Savings Plan does not allow for contributions for calendar year 2018 in 2019.
    The good news for military personnel and federal employees is, even if they have maxed out their contribution for the TSP in 2018, they are still eligible to contribute to an IRA for 2018, as long as they do it before the April 15 deadline, and as long as they do not exceed the maximum income thresholds. Speak to your tax adviser if you are a high income earner. More information regarding income earning limits can be found at The Motley Fool at www.fool.com.
    The maximum allowable contribution for IRAs in 2018 is $5,500, or $6,500 once you turn 50 years old. For 2019, the maximum allowable contribution is $6,000, or $7,000 if you turned 50 years old. The extra $1,000 deposit amount is known as the “catch-up” contribution and provides a way for older people to contribute more money since their retirement in nearing.
    The 401(k) contribution limit for 2018 is $18,500. The 401(k) contribution limit increases an additional $500 to $19,000 for 2019. The catch-up contribution limit remains at $6,000 for year 2019 as well. The same holds true for the TSP. The contribution limit for the TSP is $19,000 for 2019 and the catch-up contribution remains at $6,000 for 2019.
    The traditional version of both the IRA, 401(k), and TSP generally offers a tax-deferred advantage, meaning the monies contributed for that calendar year are deducted from the total amount of taxable income for that year, thereby creating a favorable tax benefit. The downside to this is the taxes are then paid on both the contributions and the growth when you begin withdrawing the money.
    There are limits to when you can withdraw the funds. You generally cannot withdraw monies from your traditional IRA, 401(k) or TSP without penalty until you are age 59.5. There are exceptions to this regulation — contact your tax adviser to determine if you meet any of these exceptions. You must begin withdrawing a Required Minimum Distribution on traditional investments by age 70.5.
    Page 2 of 2 - The Roth version of the IRA, 401(k), and TSP offers a tax-free investment advantage, meaning the contributions are from after-taxed dollars. The benefit is significant as the monies (deposits and growth) that accumulate in the investment are tax free. In other words, the taxes are paid going in, and then the entire investment (contributions and growth) are then tax free at withdrawal. Any matching received in your 401(k) and TSP, however, is placed into the traditional portion of your investment and, therefore, require tax considerations at point of withdrawal.
    Unlike the traditional IRA, the Roth IRA does not require RMDs. Since Uncle Sam is not collecting taxes on those funds, there is no benefit to the government and therefore no incentive for the government to require mandatory distribution of those funds. The Roth 401(k) and TSP do, however, require RMDs beginning at age 70.5.
    An IRA should be an essential part of a retirement savings strategy. It is not too late to act and get the benefits you missed out on last year that will help propel your retirement plan to greater heights. An IRA offers a tax-advantaged way, whether tax-deferred or tax-free, that provides a turbo-charged way to help grow your retirement nest egg. Don’t pass up this small window of opportunity to help enhance your financial future.
    Editor’s note: When he’s not sharing financial advice, Rodney S. Morris is an assistant professor for the Advanced Operations Course, Department of Distance Education, Command and General Staff College.
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