What’s Changing with Self Directed IRAs?

While the Tax Cuts and Jobs Act threatened to make big changes with regard to retirement accounts, there were only a few small changes that actually made the final cut. Most of the investment rules and penalties stayed the same for the 2018 year. The changes that were made dealt with recharacterization rules, Roth account income limits, 401(k) contribution limits, Saver’s Credit income limits, and uses for 529 accounts.

Roth Recharacterizations

The biggest change in the Act was the limiting of plan recharacterizations. In the past, plan owners could convert their Traditional IRA to a Roth IRA as long as they qualified, and then revert back before the end of the year if they changed their mind. Sometimes assets lost value or the tax burden for the conversion ended up too much for the owner to bear, so they would convert their accounts back before the effects took place.

Plan owners will no longer be able to take advantage of this loophole starting with any Roth conversions made on or after January 1, 2018. For conversions that occurred prior to that date, plan owners may choose to recharacterize them back to a Traditional IRA on or before October 15, 2018.

Income Limits for Roth IRA

Income limits for Roth IRAs raised slightly for the 2018 year. New contribution limits are as follows:

To contribute toward a Roth IRA, you must earn less than the maximum income limit for your category. Single filers must earn below $135,000 to qualify, and maximum contribution levels phase out starting at $120,000 (these limits increased by $2,000). Couples filing jointly must earn less than $199,000 to qualify, and their maximum contribution amounts start phasing out at $189,000 (these limits increased by $3,000). Married filing separately must earn less than $10,000 to contribute anything, although phase out starts at $1 (there was no change in these limits).

Plan Contribution Limits

Annual contribution limits for 401(k), 403(b), and 457 plans increased by $500 for the 2018 year. So, savers can contribute up to $18,500 or $24,500 if they are 50-years-old or older. For Traditional and Roth IRAs, contribution limits stayed the same at $5,500 per year, or $6,500 for those 50 or older.

Saver’s Credit Income Limits

The Saver’s Credit applies to Traditional IRA contributions for savers earning less than the income limits imposed. You may claim a tax deduction on these contributions if you earned less than $73,000 as a single person (starts to phase out at $63,000), $121,000 for married couples filing jointly where the IRA contributor is covered by a work-related plan (starts to phase out at $101,000), $199,000 for married couples filing jointly where the IRA contributor is not covered by a work-related plan but the spouse is (starts to phase out at $189,000), or $10,000 for married taxpayer filing separately and covered by a work-related plan (starts to phase out at $1). You can also learn more about Bitcoin IRA Rollover at this website.

New Uses for 529 Plans

Parents and grandparents will be pleased that 529 plan funds, which traditionally have been set aside for college expenses, can now be used for K-12 expenses related to private, public, or religious schooling. There is a caveat, however. Plan owners can only use these funds for up to $10,000 in school-related expenses per year. Note that Coverdell ESAs had always allowed plan owners to use funds for K-12 schooling and there are no withdrawal limits. There are many more differences between 529s and Coverdell ESAs, however, so study these thoroughly before deciding on one or the other.

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