The biggest change in retirement accounts for 2018 is a $500 increase in the amount you can put into a 401k. This raises the amount for all age groups, which is a huge plus.
(50 or older)
|IRA / Roth IRA|
|IRA / Roth IRA
(50 or older)
Aside from the small 401k increase, all other amounts are staying the same. Keep in mind, these are the limits on the amount you put into the retirement account. If your employer is matching your contributions in some way, that has a different limit — which also increased from $54,000 in 2017 to $55,000 in 2018 (or $60,000 to 61,000 if you’re 50 or older).
About that $55,000…
Chances are you’re not going to be able to hit $55,000 even you tried. There are two possible ways that people are able to hit this:
- Extremely generous company match
- After-tax 401k contributions (rarely allowed)
After-tax 401k contributions are a way to contribute to an account that’s effectively a Roth IRA – but with crazy high limits. It works something like this:
- You contribute to your (traditional) 401k ($18,500) and your (after-tax) 401k (up to: $55,000-$18,500-your company match).
- Money goes into two separate buckets within your account.
- When you’re able to take money out, you convert the (after-tax) 401k into a traditional IRA.
- Roll over the traditional IRA to a Roth IRA (and pay no taxes!).
This sounds like a lot of work. I’ve never been lucky enough to be at a company which allowed this strategy, but if you’re maxing out your 401k it’s worth checking out. It’s a possible way to save a lot of money in a low-tax way, but most 401k plans don’t allow this. If yours does, it’s worth taking advantage of.
Not much has changed on the IRA contribution side. There is still a $5,500/$6,000 limit, which is a combined amount amongst all IRAs you have. If you have 2 IRAs, you can only contribute this amount total — not $11,000/$12,000. When you report on your IRA contributions at the end of the year, that would be a serious red flag. Vanguard isn’t checking that you’ve already put money into an IRA at Fidelity – it’s your responsibility to know that and contribute accordingly.
Which Account Should You Use?
Choosing between 401k, IRA, Roth IRA and everything else can be a lot of research. It’s not as hard as it sounds though! There’s a handy chart created by a wonderful Reddit user that I absolutely love.
The order of accounts here is what matters – 401k up to match, IRA/Roth IRA, more 401k, then finally a brokerage investing account. If you don’t have access to a 401k, then you’ll likely jump to a brokerage account much faster. I mentioned on the FIRE Drill Podcast that I worked at some startups that didn’t have a 401k available, which led to a large amount more in brokerage than I otherwise would have.
Roth IRA or IRA?
This is a much harder question to answer. My recommendation isn’t the best possible answer for taxes, but it breaks things into 3 easy tiers:
- If you’re making under $63,000 ($101,000 married): Traditional IRA and deduct it
- If you make between $63,000 ($101,000 married) and $120,000 ($189,000 married): Roth IRA
- If you make above $120,000 ($189,000 married): Traditional IRA and use a backdoor Roth
The takeaway is to use a traditional IRA and deduct it if you can. You get the tax benefit now when you’re in earning years, and that additional amount invested will have that much more time to grow.
Traditional IRA with a Deduction? Or Roth?
Let’s look at an example of using a Roth vs a traditional for people making under $63,000. Say you invested $5,500 in a Traditional IRA and let it grow 30 years at 7%. You’d have $41,867.40.
If you invested $5,500 in a Roth IRA and let it grow 30 years at 7%. You’d have $41,867.40 as well. However, you also would’ve paid taxes on that money. If you’re in a 25% tax bracket, that’s $1,375 paid in addition. To level the playing field, what if for the Traditional IRA example, we also put $1,375 into a brokerage account and invested it as well? Here’s what you’d have:
- Traditional IRA: $41,867.40, Brokerage: $10,466.85 = $52,334.25
- Roth IRA: $41,867.40
Wow, so with by using a Traditional IRA over a Roth IRA, we’re getting $1,375 to do with however we want, and an extra 25% growth on our investments. If you’re expecting to be in a lower tax bracket when you retire, getting an extra 25% to invest is a pretty good deal!
How Much Should You Save in 2018?
As much as you can. There’s no right answer to this. It all comes down to when you want to be financially independent. The earlier you want to be FI, the more you should save – it’s that easy.
I’m planning on doing quite a bit of investing in 2018 with money coming in:
- Maxing out my 401k with $18,500
- Maxing our Mrs. Minafi’s 401k with $18,500
- Putting $5,500 into a Roth IRA for me
- Putting $5,500 into a Roth IRA for Mrs. Minafi
- Starting a joint brokerage account with Mrs. Minafi at Vanguard to fund with even more
We’ve been putting this last one off due to the odd Q4 we’re having (selling our house, moving, pre-paying for trips in Q1 2018). We’ve been setting aside money for this in our Simple account and will be transferring it over on January 1, 2018. This allows it the most time to grow in the new year (it’s time in the market after all).
What investments are you making in 2018? Which accounts are you utilizing?