Everyone Will Be Able To Save More For Retirement in 2019
Retirement savers can rejoice, as the IRS has announced the 2019 inflation-indexed increases for retirement accounts contribution limits and other key retirement plan figures. Unlike last year, both workplace retirement plans and Individual Retirement Accounts saw an increase in the amount you can contribute toward your retirement.
All figures here will be effective starting January 1, 2019 through December 31, 2019.
Workplace Retirement Plans
$19,000 max employee contribution: 401(k), 403(b), and most 457 plans
$500 increase over 2018
$55,000 for the total contribution between the employee and employer
$6,000 additional catch-up contribution limit for those over 50
$13,000 contribution limit for SIMPLE accounts ($500 increase)
401(k) Plans
The most common workplace plan saw a bump of $500, which will allow workers to contribute up to $19,000 per year and take a tax deduction for it. 401(k) plans also commonly offer a matching component, where the company adds additional money to the employee’s account. When combining the amount the employee and employer contributes, a maximum of $56,000 can be contributed for those under 50, and $62,000 for those over 50.
403(b) and 457 Plans
Non-profits and government agencies offer their own version of the 401(k) called the 403(b). And some organizations also offer a 457 plan. The 457 plan is an unusual plan in that you can contribute the maximum to both the 457 and another workplace retirement account. If you have access to a 403(b) and a 457 plan, you may have the ability to contribute a maximum of $38,000 to your tax-deductible retirement accounts. $19,000 in the 403(b) and $19,000 in the 457 plan.
SIMPLE Retirement Accounts
For those with SIMPLE or SEP plans, contribution limits increased to $13,000; after being unchanged last year. SIMPLE and SEP plans are more common for those who work for small businesses and have these plans as an alternative to the 401(k). These retirement plans are easier for small companies to set-up and manage, but their contribution limits are lower.
IRA Plans (Individual Retirement Accounts)
$6,000 per person
$500 increase
$7,000 for those over 50
$1,000 additional catch-up contribution limit for those over age 50
Traditional IRA plans allow you to take a tax deduction for the contributions you make to your retirement funds, thereby lowering your taxable income and saving on your tax bill. The Roth IRA option doesn’t offer the current tax deduction, but will avoid taxation in retirement. The maximum contribution to an IRA got a bump this year (after being left out of the increases last year) to $6,000 for 2019.
Unlike workplace plans, you can set up an IRA on your own, without having to rely on your employer.
Traditional IRA Phase-Out Limit
$64,000 to $74,000 Single taxpayers ($1,000 increase)
$103,000 to $123,000 Married taxpayers filing jointly ($2,000 increase
$193,000 to $103,000 Married taxpayers where one spouse has a workplace plan and the other doesn't (A nice $4,000 increase)
$0 to $10,000 Married filing separately (not a typo, the IRS doesn't like married filing separately)
For those below the income ranges, it is possible to ‘double dip’ and take a deduction for your workplace retirement account and take a second deduction for a traditional IRA. For those above the income limits, they may potentially contribute to the Roth IRA, which has it’s own income limits discussed later.
The ranges above show when you start to lose the deduction, and when your income gets to the top of the range you no longer can deduct from a Traditional IRA if you have a workplace plan.
Roth IRA Phase-Out Limit
$122,000 to $137,000 Single taxpayers and head of household
$193,000 to $203,000 Married taxpayers filing jointly
$0 to $10,000 Married filing separately
Contributing to a ROTH is prohibited for high-income earners, due to the fact the government is deferring it's tax collection. You'll begin losing the ability to contribute to a Roth IRA at the beginning of each income phase-out range listed above, depending on your tax filing status. When you hit the top of the income range, you'll completely lose the ability to contribute to a Roth directly. (Talk with a fee-only and fiduciary financial adviser about indirectly contributing to a Roth)
Saver's Credit
$64,000 income limit for married couples filing jointly ($1,000 increase)
$48,000 income limit for head of household ($750 increase)
$32,000 income limit for singles and married filing individual returns ($500 increase)
The Saver's Credit saw between a $500 to $1,000 increase in income limits before low-income individuals lose the credit. The Saver's Credit offers a refundable tax credit for low-income and moderate income families who actively contribute to retirement savings. If you are under the above income limit for your filing status, saving for retirement offers a double tax refund benefit for your family, along with greater retirement security for yourself.
Low income families would benefit from hiring a financial advisor who can guide them in beginning a retirement plan and claiming the deduction. They should be careful, though, of commissioned sales representatives, calling themselves financial advisors, who prey on low-income families.
Other Key Limit Increases
Although the above are the most common retirement changes affecting Americans, a few other items impact for high-income employees. These limits are summarized below, but aren't discussed in detail. They are important for financial advisers, tax preparers, and Human Resources professionals.
$280,000 annual compensation limit (up $5,000)
$180,000 for the definition of key employee in top-heavy plans (up $5,000)
$125,000 for the definition of highly compensated employee (up $5,000)
Joshua Escalante Troesh is a tenured professor of Business at El Camino College and the founder of Purposeful Finance. He is also the owner of Purposeful Strategic Partners, a fiduciary and fee-only financial planning firm and a Registered Investment Advisor. He can be reached for comment at info@purposefulfinance.org