Tax FAQ Series: Can You Provide General Information Regarding Retirement Plans?

Note that a good investment/financial advisor is very knowledgeable on this front and should be able to guide you in the specifics of using retirement accounts (along with a variety of other investment vehicles) in order to accomplish your financial objectives.

Here are some general concepts (using limits for tax year 2019 – note that these limits can change each year):

The TOTAL of all contributions you can make to ALL retirement plans annually is currently $55,000.

  • IRA’s

Your max allowable annual contribution to any type of IRA is $6,500 (including the catch-up amounts). You and your spouse may be able to make contributions of this amount from your earnings so long as you have ordinary income enough to cover the amount.

  • 401K Plan

Your max allowable annual contribution to any type of 401K plan is $24,000 (again, including the catch-up amounts). You can each also make contributions to your own plans. These contributions are generally made as pre-tax deductions from your W-2 wages. Your employer can also make contributions to your 401K (and match the ones you’ve made) depending on the “rules” of the plan you establish.

  • SEP Plan

Your max contribution to your SEP is limited to 25% of your ordinary income (generally your W-2 wages) or $55,000 annually, whichever is SMALLER. In order to increase your SEP contribution, you’d have to increase your W-2 wages and that doesn’t always make sense because doing so also increases your self-employment tax.

Please consider the above as general information and not a specific recommendation. It is imperative that you set your financial objectives first, then work with your investment/financial advisor to set a strategic plan that will assist you in accomplishing those objectives. Your tax strategy, and retirement strategy should all be set in the context of your overall financial objectives and strategy. Making contributions to retirement accounts, increasing wages, etc. are all decisions that make sense (or don’t make sense) when evaluated in the context of your financial strategy.