IRS Increases Annual 401(k) Contributions

If you are fortunate enough to have an employer match, the end results are even better.

The IRS has raised the contribution limit for a 401(k) plan by $500 next year and it can make a difference over the years in your retirement fund, according to The New York Times in “I.R.S Is Raising 401(k) Contribution Limits in 2019.”

It may not seem like a lot, but it should encourage more employees to save for retirement. The IRS announcement is that the employee contribution limit for 401(k)s and other workplace-based retirement plans will take a jump to $19,000.

When employees enroll in a 401(k) plan, money goes in as pre-tax dollars and isn’t taxed until withdrawn. For workers 50 years and older, there is an additional “catch up” contribution opportunity of $6,000. This amount is not changing in 2019. That means if you are 50 and older, you can contribute as much as $25,000 next year.

401(k) plans, which are named after a section of the tax code that created them, have been around for four decades. Workers typically open accounts as part of their employee benefits package. As employees make their decisions during open-enrollment season for 2019, advisors recommend increasing their payroll contributions to their 401(k) plans.

This is a good time to review your overall retirement saving strategies. Let’s say you take advantage of the new contribution limits. If you invested $500 annually over the course of 30 years (assuming you are in the early years of your career), a 7% average annual rate of return will add $47,000 to your retirement savings accounts.

For those who are lucky enough to have an employer who matches contributions, which range from 3% to 5% of pre-tax paychecks, take advantage of this perk and contribute as much as required, to maximize your employee-match.

Advisors recommend increasing contributions by 1% every year, which makes a big difference in the long run. Others remind us of the basics: Start saving early and take advantage of the power of compounding and time.

Even if your employer does not have a retirement plan, you can open one up on your own with an Individual Retirement Account (IRA). Contributions to IRAs are also increasing in 2019, for the first time in five years. You can increase your contribution up to $6,000, a $500 increase over last year. If you are 50 years or older, you can save an additional $1,000.

Bottom line: it is never too early to start saving for retirement, because the longer you can save, the better.

Reference: The New York Times (Nov. 9, 2018) “I.R.S Is Raising 401(k) Contribution Limits in 2019”