2019 Year End Tax Planning for Retirement Plan Participants

Most retirement plans allow employees who will have reached age 50 by the end of a year to make “catch-up contributions” in that year.

The opportunity for an employee to make “elective deferrals,” i.e., to contribute a portion of his compensation, on a tax-deferred basis, to a 401(k) plan, SIMPLE IRA plan, Simplified Employee Pension (SEP), 403(b) plan, and/or governmental section 457 eligible deferred compensation plan, is one of the most attractive means of saving for retirement. But the Code specifically provides annual limits on the amount of elective deferrals, and indirectly limits elective deferrals through nondiscrimination rules and overall limits on contributions. In addition, many plans provide a cap, usually as a percentage of compensation, on the amount that an employee can contribute to the plan on a tax-deferred basis.

Plans providing for elective deferrals may allow employees who will be age 50 by the end of a year to make additional “catch-up contributions” in that year, regardless of otherwise applicable limits.

The maximum annual catch-up contribution for plans other than SIMPLE 401(k) plans or SIMPLE IRA plans is $6,000 for 2019. This amount will be adjusted for inflation in later years. The maximum annual catch-up contribution for SIMPLE 401(k) plans and SIMPLE IRA plans is $3,000 for 2019. This amount also will be adjusted for inflation in later years.

Catch-up contributions provide a significant tax deferral opportunity to employees over age 50-even if the over-age-50 employees are mostly highly compensated. That is, catch-up contributions are not taken into account in applying most of the nondiscrimination rules that otherwise apply to 401(k) plans, SEPs, and SIMPLE IRAs. Thus, an eligible employee would be able to defer compensation up to the catch-up contribution maximum amount, in addition to the amount that the employee would otherwise have been able to defer without the catch-up provision.

The right to make the same catch-up contribution election does have to be available to all eligible employees, if the employer provides for catch-up contributions under any of its plans. But again, there are no adverse tax consequences if the employees that actually elect to make catch-up contributions are mostly highly compensated employees.

Unlike catch-up contributions, any contributions that an employer makes to match catch-up contributions must still meet all the nondiscrimination rules that otherwise would apply. Also, catch-up contributions for prior years are taken into account in applying the top heavy rules and minimum coverage rules, for plans subject to these rules, e.g., 401(k) plans.

A self-employed person who wants to contribute to a Keogh plan for 2019 must establish that plan before the end of 2019. If that is done, deductible contributions for 2019 can be made as late as the taxpayer’s extended tax return due date for 2019. However, a self-employed person who misses the year-end deadline to establish a Keogh plan has until his extended 2019 return due date both to establish and to make deductible contributions to a Simplified Employee Pension (SEP) for 2019. Keogh plans, however, can be designed to provide more flexibility for a self-employed business owner than a SEP can provide.

Also, since the contribution deadline is extended where the filing deadline has been extended, taxpayers who temporarily lack sufficient funds or are otherwise delayed in making post-year-end contributions should request an extension of time to file their return.