Know Your Money: IRS raises retirement plan contribution limits for IRAs, 401(k)s and more

Know Your Money: IRS raises retirement plan contribution limits for IRAs, 401(k)s and more

October 21, 2018

You’ll have the opportunity to save more for retirement next year. The Internal Revenue Service announced this week that it will increase the contribution limits for a range or retirement accounts in tax year 2019. For the first time since 2013, IRA contribution limits are being increased. The IRS also announced an increase in the contribution limit for 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan.

Annual contribution limits for your workplace retirement plan are increasing by $500 next year. While that may not sound like much, the additional money can grow substantially over time, financial advisers say.

The IRS announced this month that the employee contribution limit for 401(k) and similar workplace retirement plans will be $19,000 next year, up from $18,500.

With 401(k) plans, workers save and invest part of their paycheck before taxes are taken out. The money isn’t taxed until it is withdrawn from the account.

Workers who are 50 or older also can make an extra $6,000 in “catch-up” contributions, an amount that isn’t changing for 2019. That means an older employee can contribute as much as $25,000 next year.

The plans, named for a section of the tax code, have been around for 40 years. Fidelity Investments said the average balance in its 401(k) plans reached an record high of $106,500 in the third-quarter of this year, and that the number of people with $1 million or more in their accounts rose to more than 187,000.

So as workers weigh their open-enrollment benefit decisions for 2019, they may want to increase their payroll contributions to their 401(k).

“It’s a great time to review their strategy,” said Neal Van Zutphen, a financial planner in Tempe, Ariz.

He calculated that investing that extra $500 annually over 30 years, with a 7% average annual rate of return, would yield about $47,000 in retirement savings.

In general, advisers suggest contributing at least enough to receive your employer’s matching contribution. Many companies match payroll deductions — often 3, 4 or even 5% of your pay — to encourage workers to participate.

If you can afford to, increasing your contributions by 1% point each year — say, from 5% of your salary to 6% — can make a big difference in the long run, said Brendan Mullooly, a financial planner in Wall Township, N.J.

Steven Brett, president of Marcum Financial Services in New York, offered this additional advice: “Start as early as possible and take advantage of compounding and time. The earlier you do it, the less you have to put away.”

If your employer doesn’t offer a retirement plan, you can open an individual retirement account. Contribution limits to IRAs are also increasing next year, for the first time in five years. For 2019, you can contribute up to $6,000, an increase of $500. People 50 and older can save an extra $1,000, for a total of $7,000.

Here are some questions and answers about retirement savings:

Is it too late to contribute more to my 401(k) for 2018?

Marina Edwards, a senior director of retirement with Willis Towers Watson, suggested that workers ask their human resources department to provide an estimate of what their contributions will be for this year. If they haven’t met this year’s maximum contribution of $18,500, and can afford to put away more money, they may want to consider increasing their payroll contributions.

Is it better to contribute to my 401(k), or to a health savings account?

Contribute to both if you are eligible, Ms. Edwards said. HSAs are special savings accounts available to people with certain high-deductible health insurance plans. Their “triple tax” benefit makes them an excellent way to save, she said. Money goes in tax free, grows tax free and is withdrawn tax free, when the money is spent on eligible health and medical expenses.

Many people confuse HSAs with flexible health spending accounts, which are geared toward short-term health needs, Ms. Edwards said. You can use the money in an HSA for current health needs if you must, but letting it grow long term is smart, she said, since most people will have health needs in retirement.

Ms. Edwards suggests a three-step approach: Contribute to your 401(k) up to the company match. Then fund your HSA, to the maximum if possible. (For 2018, individuals can contribute up to $3,450; the total rises to $3,500 in 2019. The limit for catch-up contributions by those 55 and older remains $1,000.)

Then, if you can afford it, contribute more to your 401(k).

Anything else I should do to make sure my retirement savings are secure?

While you’re tweaking your plan contributions, Ms. Edwards said, take a minute to check that you have a strong password for your online retirement account, and review transactions to make sure there isn’t any suspicious activity. Retirement accounts are not immune to hacking, she said, so it’s wise to follow good online security practices.

Phaseout ranges also released

The phaseout ranges for IRA deductions in the 2019 tax year were also released.

  • The phaseout range for single taxpayers covered by a workplace retirement plan will be $64,000 to $74,000 – increased from $63,000 to $73,000.
  • The phaseout range for married couples filing jointly, where the spouse contributing to the IRA is covered by a workplace retirement plan will be $103,000 to $123,000 – up from $101,000 to $121,000.
  • For IRA contributors not covered by a workplace retirement plan, who are married to someone who is covered, the deduction is phased out if the couple has an income between $193,000 and $203,000 – an increase from $189,000 and $199,000.
  • For married individuals filing a separate return, who are covered by a workplace retirement plan, the phaseout range remains $0 to $10,000.

The phaseout ranges were also updated for Roth IRAs:

  • $122,000 to $137,000 for singles and heads of household, which is up from $120,000 to $135,000.
  • $193,000 to $203,000 for married couples filing jointly, which is up from $189,000 to $199,000.

The phaseout range for and individual who is married and filing a separate return who contributes to a Roth IRA isn’t subject to annual cost-of-living adjustment. This phaseout range remains at $0 to $10,000.

Take advantage of tax-advantaged accounts

If you have access to an employer-sponsored retirement plan, try to contribute as much as you can in the 2019 tax year – especially if you receive a matching contribution from your employer. Also consider opening up an IRA and calculating your progress.

“The first stop for retirement savings is to utilize tax-advantaged retirement savings accounts such as a workplace 401(k), 403(b), or 457 plan and an IRA,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “With tax-advantaged accounts, the government is giving you a helping hand toward saving for your future, either by making pretax contributions now or tax-free withdrawals in retirement. Further, many employer sponsored plans offer a matching contribution or safe harbor contribution from the employer that amounts to free money for your retirement account.”

While the changes won’t go into effect until next year, it’s smart to start planning your future 401(k) contributions today.

“Spread it out over the year,” says Barry S. Kleiman, CPA, principal at Untracht Early LLC and a member of the NYSSCPA’s Taxation of Individuals Committee.

Because you can make 2019 contributions to an IRA up to April 15, 2020, there’s not as much planning needed to maximize your IRA as there is with 401(k) contributions.

“Some people like to do it early, but more importantly is the 401(k) and making sure your deferral is proper,” Kleiman says.

Sources:, The New York Times and The Wall Street Journal