As the first quarter of the new year draws to a close, the time for broken resolutions and adjusting to the new tax laws also is coming to an end. Now is the time to get a close look at your overall financial picture, which should have included making any needed adjustments to your W-4 and the impact of any projected salary increases. Retirement planning needs to be high on the list of things to do because once we start heading into the warmer temperatures, retirement will be one of the last things on your list. There have been some important changes for both 401(k) plans and IRAs with the new tax law, so to get you up to date here are a few of the most important ones that are likely to impact you whether you are 25 or 55.
401(k) Plan Employee Contribution Limits
The new law divides the impact of these changes into two age groups – those who are under 50 and those over 50. Both groups are able to contribute $500 more into their plan for 2019. And both groups can contribute a maximum amount of $19,000 for the 2019 calendar year. This is not about the government being generous but rather the $500 is a result of an increase in the rate of inflation. Remember the Federal Reserve increasing the interest rate? That increases inflation and therefore your maximum employee contribution was bumped up.
If you are over 50 years old there is an added feature in the tax law called the catch up contribution. The reason is that there are so many people unable or unwilling to start saving for retirement until the last minute that these people are given the opportunity to save an extra $6,000 for calendar year 2019. That brings the maximum amount of 401(k) contributions to $25,000. This applies whether you have saved a paltry $10,000 for retirement or executed a plan to save $1 million.
Though this is something you likely have zero control over, the new tax law has also increased the amount your employer can add to your 401(k) plan. This is a good time to find out how generous your employer is being with your 401(k) plan. But the people who benefit the most from this increase are the self-employed. Why? Because the employer and the employee are the same person. The 2019 maximum amount for this benefit has been increased by $1,000 to $56,000. If you are over 50 you can add another $6,000 to the total bringing it to a $62,000 maximum.
IRA Contribution Limits
Like the 401(k) tax laws, the IRA contribution laws are divided between those under 50 and those 50 and over. In comparison to 401(k) rules the IRA is definitely the second choice for retirement savings. For the under 50 group it is a modest $6,000 a year. Those over 50 get a boost to $7,000. What is somewhat depressing is that this is the first time the IRA maximum has been increased in several years, and is not likely to see any further increases for years to come. In other words, don’t expect the government to help you fund your retirement apart from 401(k) plans any more than this for many years to come.
As with the 401(k) rules, there is a catch up contribution exception for those over 50. That number is a mere $1,000 so while every little bit helps it is not going to be a significant factor in retirement savings.
Know that not all traditional IRA contributions are tax deductible. One basic rule that always applies is if you (or you and your spouse) are not investing in a 401(k) your total IRA contributions will always be deductible. This is true whether you make $1,000 or $1 million. But if you are a 401(k) participant then the rules change.
The amount of the tax deduction will depend on your filing status. After an annual income of $74,000 your eligible deduction is $0. If you are married filing jointly then that number increases to $123,000. As usual, married filing separately gets you the least tax benefit, with a maximum income of $10,000 bringing your IRA tax deduction to a screeching halt. The actual calculation is a bit complicated, so you will want to talk to a knowledgeable tax person if you have to deal with this.
The new tax law also affects other retirement plan options such as the Roth IRA and the SIMPLE 401(k) plan, the latter only applying to small businesses. If you are someone who is over 50 and playing catch up, then this is a good time to know these numbers and get busy saving for retirement by taking advantage of the increases. If you are under 50, this is a good time to start calculating how much of your income you can stash into your 401(k) and IRA because tax laws have been known to change for the worse over the long haul.