IRS Issues 2018 Contribution Levels; New Tax Law Proposal Unnerves
October is the month in which the Internal Revenue Service always releases the annual limits that will govern all retirement plans for the next calendar year, including defined benefits plans like the TPAF and PERS, and defined contribution plans like 403b, 457, 401k and IRA plans. The figures for 2018 have recently been issued and they show that most plans for those educators that qualify will permit slightly greater contributions next year than in 2017.
However, with Congress contemplating completion of a new tax code, some of the numbers, and perhaps even some of the retirement offerings might change as the 2018 year progresses. Thus, the information contained in this article might be changed in 2018 or in future years due to political action.
For educators, the major area of change occurs in the 403b tax-deferred area where the amount that can be tax-deferred in 2018 will increase to $18,500 from the $18,000 that is the top amount in 2017. Catch-up for those over 60 who qualify will remain at $6,000. This increases the maximum deferral for those educators over 60 in 2018 to $24,500.
In some districts, educators are able to take advantage of 457(e) plans. In these locations, tax-deferred amounts of $18,500 will be permitted in 2018, an increase of $500 over the amount which is permitted in 2017. Here, again, an additional catch-up for those over 60 of $6,000 will be permitted in 2018.
The changes also affect the limits relating to the maximum compensation that can be used in calculating the final average salary for those in TPAF and PERS, which have been increased to $275,000 in 2018 from $270,000 in 2017. Anyone whose salary exceeds this amount will have the final average salary calculated on the limited amount of $270,000 rather than any larger amount.
The same kind of limited maximum occurs where the largest amount of annual pension payable to a newly retired individual in 2018 under a defined benefit plan is $220,000 per year. In 2017, that amount was $215,000.
NEW REPUBLICAN TAX PLAN
On November 2, a new tax plan was released by the Trump administration and House of Representative Republicans which would overhaul many aspects of the current tax code. One item, in particular, drew the immediate attention of those who work in the retirement area - limitations on 401k plans, which are the main retirement plans in the private sector and are closely related structurally to the 403b plans in the public sector. In fact, many major components of 401k plans and 403b plans are the same: contribution limits, tax deferral action, and withdrawal requirements. So it seems plausible that whatever changes in the tax code that affect 401k plans will also affect 403b plans. Consequently, advocates of 403b plans were as concerned as 401k advocates by the threatened action.
What drew the attention of 401k (and 403b) advocates was the idea that the amount of contribution permitted to 401k plans be reduced for those under age 50 to $2,400 per year from the $18,000 limit in 2017 and the $18,500 initially proposed for 2018. It will also allow $24,000 in contributions for those 50 and over. Thus, the amount of savings for future retirees would be severely reduced.
The purpose of the proposal was to generate more income tax monies to balance tax savings that will be part of the new tax legislation proposal. The less that can be contributed to pre-tax programs like 401ks (403bs), the more income tax money can be raised on the balances that then become taxable. Reducing the pre-tax contribution level of 401k plans from $18,000 to $2,400 produces huge amounts of taxable dollars.
The idea was dropped after the outcry by retirement proponents, but the fact that it was even suggested has made all retiree advocates leery of the proposed tax bill. At a time that there is a concern about funding of all retirement plans, it is frightening to see the minds of politicians even considering raising new tax revenue by reducing retirement benefits.
And while the new tax proposal is continuing to be debated, it behooves all who are concerned with retirement issues to pay close attention to Washington.