UPDATE: 2019 – 401(k) and IRA Limits

Although we assume many of our readers know what a 401(k) and an IRA are, let’s cover these quickly.

What is a 401(k)?

401(k) retirement, savings, and investment accounts are tax-deferred ways to invest your money where your contributions are typically matched – a portion of those earnings, usually not all of them in dollar-for-dollar fashion – by your employer. These plans are named after the section of the Internal Revenue Code – 401(k) – that lays out the rules for these plans.

There are other benefits that 401(k) plans bring to the table, such as not having to pay money on the growth of your 401(k) account over the years. This reduces your taxable income, a valuable perk during your peak earning years. The government taxes withdrawals in retirement, but most people won’t have high incomes at that time. As a result, they will make their withdrawals in a lower tax bracket. Even if they are withdrawing large amounts of money, the asymmetric nature of tax brackets means most of them will benefit from the lower taxes – an easy way to play some tax arbitrage.

What is an IRA?

IRA is short for Individual Retirement Account, which is a type of investment account and is one of the easiest ways to save for retirement.

Individual Retirement Accounts can be used to purchase stocks, mutual funds, ETFs or other financial instruments – basically all kinds of investments. Further, IRAs may also provide tax breaks that help reduce your taxable income, and the taxes you must pay. 

Now that you understand what a 401(k) plan and an IRA are, let’s highlight this year’s changes to the 401(k) account’s contribution limit

Up until 2018, Americans who are saving for retirement were able to sock away $15,000 in their 401(k) accounts and $5,500 in their Individual Retirement Accounts. 

Starting in 2019, these contribution limits have increased by $500 for each account.

If you use 401(k), 403(b), and 457 accounts, as well as the Thrift Savings Plan, you will be legally able to shelter $19,000 in earnings in 2019. IRA limits have increased to $6,000.

If you’re in a marginal tax bracket of 24%, and also pay a state tax bracket of 9.3% like many of our California clients, contributing $19,000 to your 401(k) helps reduce your  income tax by $6,327. Sort of like a tax subsidy from the government to help fund your retirement accounts.

Workers who are of at least 50 years of age will be able to contribute a maximum of $25,000 to such accounts in 2019, which is up from the cap of $24,500 from last year. 

The 2019 Individual Retirement Account Contribution Amount

In 2018, the IRA contribution cut-off was $5,500. It had remained at this amount since 2013. This year’s $6,000 limit can be contributed anytime until April 15^th, 2020.

American workers who are of age 50 or greater will not be able to store more money to their Individual Retirement Accounts in their later years in a greater amount than what was available in previous years. The catch-up contribution cap for the Individual Retirement Account will stay true at $1,000.

Traditional IRA Changes

People who own 401(k) accounts can’t claim tax deductions on their contributions for 2019 if their earnings are more than $74,000 if filing individually, or $123,000 as a married couple. Each of the amounts increased $1,000 this year and $2,000 this year, respectively. The tax deduction starts being phased out at the amounts of $64,000 and $103,000 for 2019.

Roth IRA changes

This year, the maximum income ceiling for Roth IRA contributions after has risen $2,000 for individuals and $4,000 for married couples filing jointly. 

People earning $137,000 individually or $203,000 as married couples can’t contribute to Roth IRAs. Their ability to contribute starts to be phased out at $122,000 and $193,000 for individuals and married couples, respectively.

Once you move to a different employer, or retire, you’ll want to rollover the 401(k) balances. This helps prevent maintaining several accounts with different institutions, making your finances simpler to manage, and making the calculations and withdrawals of Required Minimum Distributions in retirement much easier.