Recently I sat down with a couple friends who were well educated on money matters. One of them was a Finance major in college and the other one had worked in the financial field years back. So I was a bit worried when I heard them both repeat something that was blatantly wrong. In fact, it wasn’t just wrong, but in the eyes of the tax man, it was illegal. And thinking back to my own time in wealth management, I remember hearing professionals tell clients that they weren’t sure about the tax laws.
Now my friends aren’t out committing crimes. And these wealth management professionals aren’t ignorant. They are just trying to save for the future within the scope of their knowledge. But in the eyes of the IRS, it doesn’t much matter. If you’ve broken the rules, you will pay for it, literally, with a fine.
Retirement accounts are tricky. The government gives you an annual limit as to how much you may contribute to one, and the rules vary by account. A good run-down on how much that is can be found on the IRS’s website here (for IRA accounts:) and here (for 401k accounts). The quick and dirty is that the 2018 limits are $5,500 for IRAs and $18,500 for the 401k. But read the pages carefully if you are thinking about going anywhere near those limits because the actual rules are much more complex!
For instance, let’s say you have a Traditional IRA and a Roth IRA. You can only contribute a combined total of $5,500 across these accounts. For example, if you contribute $2,000 to your Traditional IRA, you are only allowed to contribute a remaining $3,500 to your Roth IRA. And Roth IRAs have phase out limits set by the IRS. In other words, if you make too much money, you may only contribute a smaller amount, or perhaps none at all.
Or, let’s say you are covered by a 401k or pension plan at work. The IRS has limits on how much you can contribute to a Traditional IRA and still receive your tax deduction. And if you are self-employed there are even more rules and more account types. Have a high deductible on your health insurance, there’s even another type of plan.
If growing your wealth was simple, we’d all be rich and accountants would be out of work. Have more questions, ask below or contact a professional. If you’re not sure, you should probably seek out help.
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