facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external search brokercheck brokercheck
%POST_TITLE% Thumbnail

Military Finances 201: How Do Retirement Accounts Affect Each Other?

Retirement Funding

The Basics

There are two types of retirement accounts. Individual Retirement Accounts (IRA) and Employer Sponsored Plans (401(k), 403(b), TSP and others). The two types of accounts rarely affect each other. But if you have more than one account inside one of the above types, there can be limits.

Individual Retirement Accounts (IRA)

If you or your spouse have earned income, you can contribute to a Traditional IRA. The general limit is $6,000 (2019 numbers) or your or your spouse’s earned income, whichever is less. If you are using a spouse’s income to contribute to an IRA then your combined contributions can’t exceed his or her earned income or $12,000. If you are age 50 or older you can contribute an additional $1,000 per year (assuming earned income isn’t a limiting factor). You can do this regardless of whether you have access to an employer plan and contribute to it. But…an employer’s plan may limit the deductibility of contributions to a Traditional IRA. If you are covered by a retirement plan at work (which will be marked on your W-2), you will begin to lose the ability to deduct IRA contributions when your Modified Adjusted Gross Income (MAGI) reaches $103,000 Married Filing Jointly (MFJ) or $64,000 if Single or Head of Household. You can’t deduct anything if your MAGI exceeds $123,000 MFJ or $74,000 if Single. You can still contribute. You just can’t deduct it. If your spouse is an active participant in a retirement plan at work but you are not, then the phase out range is from $193,000 to $203,000.

While everyone can contribute to a Traditional IRA, not everyone can contribute to a Roth IRA. Roth IRA’s have income limits. For married taxpayers the limits are the same as for a spouse without a retirement plan at work. In other words, if you are married, your ability to contribute to a Roth IRA starts to phase out at $193,000 and is completely phased out at $203,000 of MAGI. For Single taxpayers and Head of Household the phase-out range is $122,000 - $137,000.

Employer Accounts

You can contribute up to $19,000 to retirement accounts like a 401(k), 403(b) or TSP. If you are 50 or older, you can contribute to an additional $6,000 per year for a total of $25,000. As the contributions can only be made by payroll deferral, the amount can’t exceed your wages. Your contributions to an IRA, Roth or Traditional, have no impact on your contributions to your employer provided plan and vice versa. It is important to realize that the income limits on contributions to a Roth IRA do NOT apply to a Roth 401(k), 403(b) or TSP. You can (not saying you should) contribute to a Roth employer plan regardless of income. There are no income limits.

There is a limit on the total amount that can be contributed to an employer sponsored defined contribution plan. For 2019 that limit is $56,000. So, if you contribute $25,000 your employer match can’t exceed $21,000. This isn’t a problem for most of us. But if your employer makes very large contributions (one major airline comes to mind), then make sure your contributions don’t limit the amount that your employer can contribute.

There Are Always Exceptions

If you work for a small employer, you may be offered a SIMPLE Plan. SIMPLEs operate a lot like a 401(k), but the contribution limit is lower ($13,000 in 2019 with $3,000 catch-up) and a match/employer contribution are required. 

You may also be offered a SEP-IRA. While this account is an IRA, it is treated as an employer account and has the same effect on your IRA contributions as the plans mentioned above.

If you work for a state or local government, you may be offered both a 403(b) and a 457 plan. In this situation, you can contribute the maximum to each account. This means you could defer up to $50,000, if you are age 50 or older. Conversely, if you have two jobs that offer a 401(k), you are limited to the annual amount for both accounts. In other words, you would be limited to $19,000/$25,000. This can bite you if you change jobs during the year.

Whether you have a military TSP and are getting matching under the Blended Retirement System (BRS) or have retired from the military and now have a 401(k), it is important to understand the rules above. If you’d like some more help, give us a call.


If you liked this article, you might enjoy the following blog posts:

Retired Military Finances 101: Getting Your Matching Contributions


Delay Your Required Minimum Distributions...Legally


6 Things to Consider if if Your Post-Military Employer Offers an Unmatched 401(k)





Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.