Now that the first year of the Tax Cuts and Jobs Act (TCJA) is almost past us, some IRA and solo 401k items to consider include the following.
While a solo 401k plan will need to be opened by December 31 in order to be able to wait until next year to make solo 401k contributions, an IRA can be opened for 2018 and funded by April 15, 2019. This will afford you time to plan which IRA to contribute to, whether a traditional IRA, Roth IRA or both. The maximum 2018 contribution is $5,500 plus an additional $1,000 who were 50 or older by year-end 2018.
While IRA contributions and solo 401k contributions can be made next year, both IRA and solo 401k distributions will need to be made by the end of the 2018 to count as occurring in 2018. This includes RMDs, as if not taken by 12/31/2018 a 50% penalty for failure to take the 2018 RMD may apply. Distributions take from either an IRA or a solo 401k plan in the case of pre-tax funds will be added to other taxable income and taxed at applicable marginal rates.
While qualified charitable distributions (QCDs) apply to IRAs, they do not apply to solo 401k plans. However, in order for QCDs to apply to IRAs, the IRA owner or beneficiary has to be age 70 1/2 or older, and the annual limit for 2018 is $100,000 per person. The QCDs count toward RMDs.
Conversions of Pretax Funds
The Tax Cuts and Jobs Act (TCJA) lowed the federal income tax rates from 2018 through 2025. As a result, 2018 is a year that many IRA and solo 401k owners are processing Roth solo 401k and Roth IRA conversions because they are now less taxing. Pretax IRA or solo 401k funds converted to a Roth account will be treated at earned income tax rates, but with the lower tax rate the tax hit won’t be as large. For example, in 2018 a married couple filing jointly can have taxable income (after deductions) between $77,400 and $165,000 and remain in the 22% tax bracket. On another note, because of the the TCJA starting in 2018 Roth IRA conversion can no longer be unwound (recharacterized) which has never been an option for Roth solo 401k conversions.