If you’re behind on saving for retirement, good news. The IRS recently announced 2019 contribution limit increases for a range of retirement accounts. Here’s a rundown of the changes that may affect you:
401(k), 403(b), Most 457 Plans, and the Federal Thrift Savings Plan: You can contribute $500 more in 2019, from $18,500 to $19,000. However, the catch-up contribution for workers age 50 and older by the end of 2019 remains the same at $6,000. Therefore, the total maximum including the catch-up is $25,000.
After-Tax 401(k) Contributions: Your employer retirement plan may allow Roth contributions, which apply to the employee contribution only and are not tax deductible now but allow for tax-free withdrawals later. If you have the option, consider Roth contributions as part of a tax diversification strategy. Who knows what future tax rates will be?
If your plan allows after-tax contributions to your 401(k), you’ll have a cap of $56,000 in 2019. This cap includes your pretax or Roth contributions as well as your employer’s contributions. If your plan permits catch-up contributions and you are age 50 or older by December 31, 2019, you can contribute an extra $6,000 for a total of $62,000. Check with your plan administrator. After-tax contributions can be rolled to a Roth IRA at retirement.
SIMPLE IRA: If you have a Savings Incentive Match Plan for Employees Individual Retirement Account (SIMPLE IRA), then you can contribute $13,000 in 2019. That’s a jump from $12,500 in 2018. The catch-up limit remains $3,000.
SEP-IRAs and Solo 401(k)s: Contribution limits will increase by an additional $1,000, from $55,000 to $56,000. In addition, the compensation limit used in the contribution calculation is increasing, from $275,000 to $280,000.
Defined Benefit Plans: A defined benefit plan can turbo-charge your retirement savings while potentially reducing your current income taxes. In 2019, you’ll be able to contribute up to $225,000, a $5,000 boost over 2018.
Individual Retirement Accounts (IRAs): You’ll be able to contribute $6,000 to an IRA in 2019, a jump from $5,500 in 2018. The catch-up contribution for 50-and-olders remains the same at $1,000.
Roth IRAs: If you contribute to a Roth, you’ll be able to put $500 more into your account, from $5,500 in 2018 to $6,000 in 2019. The catch-up contribution remains at $1,000. Roth IRAs are also great for teenagers or college-age students who have employment income.
A Word About Phase-outs
Both Roth IRAs and traditional pretax IRAs have phase-outs that depend on an investor’s tax filing status and income levels. It’s important to review any phase-outs that may apply to you before contributing to IRAs or Roth IRAs.
Flexible and Health Savings Accounts
If you have a flexible savings account (FSA), you’ll be able to put aside an additional $50, from $2,650 to $2,700.
If you have a health savings account (HSA), your contribution limits will increase from $3,400 to $3,500 for single coverage and from $6,900 to $7,000 for families. A $1,000 catch-up contribution may be added if you are age 55 or older.
What Does This All Mean?
We Americans are living longer than ever, making it a good rule of thumb to save for a retirement that lasts 30 or more years. This increased longevity makes saving early and consistently important to give your investments a chance to compound. For late starters, it makes diligence in saving even more crucial.
How much should you be saving? It depends on your situation, including your age, how much you have in savings, and the income you want in retirement. But a good rule of thumb is to put aside 15% to 20% (the more the better) of your earnings.
For high-wage professionals (generally those earning over $275,000 per year) who expect to maintain a similar standard of living in retirement, it’s important to supplement increases in contribution limits like the ones that the IRS just announced. If you’re solely relying on a 401(k), you’re probably not going to save enough to accomplish the retirement you want. You’ll need to take additional steps. See our article “When You Need More Than the Maximum: 4 Tips for High-Income Earners to Save for Retirement” for ideas.
You can also go beyond retirement accounts and put your savings in a brokerage account titled in a single, joint, or trust name, investing in a tax-efficient investment such as index funds or exchange-traded funds (ETFs). You won’t get the tax deduction benefits that retirement plans offer, but you will be able to contribute as much as you want, giving your retirement savings a boost.
As always, check with your retirement plan administrator about your specific plan’s rules, and check with your tax advisor about your specific income tax situation.