2019 Contribution Limits and the Changes Impacting Your Retirement
There have been a few updates on how much you can save for retirement.
On November 1, the new contribution amounts for 2019 were announced by the IRS. Not only does this affect your 403(b) contribution levels, but there are also new amounts for IRAs and other types of IRS-sanctioned accounts.
What does this mean for you and your retirement nest egg?
We shall see.
We’ll explore the impact of these new contribution amounts for each option in this article. We also thought it might be a good time for a refresher on the ways you can save for retirement.
What Are The New 2019 Contribution Limits?
Let’s review the numbers first and where the contribution amounts have been updated for 2019.
Here’s the good news. The IRS has announced that you can contribute more in 2019 than you could in previous years. The IRS has adjusted the maximum contribution to your 401(k), 403(b), most 457, and TSP plans from $18,500 to $19,000 annually for 2019. We will talk more about these types of plans later in the post.
And, in case you were curious as to why, the amounts are adjusted as necessary to keep up with rising inflation.
With the various IRS-Sanctioned retirement accounts, you have the option to contribute more, referred to as a “catch up” if you are age 50 or older. If you are choosing to utilize the catch-up rule, then as an individual the rates are going to stay the same as they were in 2018. If you are 50 or older, you can still contribute up to an additional $6,000 annually. For those who maximize the $19,000 then that would mean you would be eligible to contribute a total of $25,000 as an individual to your 401(k), 403(b), most 457 and TSP plans in both 2018 and 2019.
At this point, you might also be wondering about your IRAs. Did we see an increase for those accounts as well?
The other good news is yes! The past 5 years you have been allowed to contribute up to $5,500 annually for an IRA. For 2019, the new maximum contribution amount has also increased to $6,000. This applies to both the traditional IRAs and the Roth IRAs.
And like the other plans, the catch-up amounts for those of you who are 50 and older, are also staying the same in 2019 when it comes to IRAs. As an individual, you can contribute an additional $1,000 annually to an IRA if you fall within the qualifying age group.
There have been updates to the income limits for traditional IRAs. Before 2019, the income phase-out limit for singles was $63,000-$73,000. This has increased in 2019 to $64,000-$74,000. For a married couple filing jointly, the amount is up from $101,000-$121,000 and increased to $103,000-$123,000.
The Roth IRAs have also seen an increased income phase-out level. Before 2019, the income phase-out limit for singles was $120,000-$135,000. This has increased in 2019 to $122,000-$137,000. For a married couple filing jointly, the amount is up from $189,000-$199,000 and increased to $193,000-$203,000.
These additional contribution amounts allow you the opportunity to potentially save even more towards retirement, all while reducing your tax burden. If you have the chance to take advantage of one of these types of retirement accounts, then it’s worth understanding how much you can contribute each year.
But let’s back up a little bit and review the basics when it comes to various types of retirement funds. These contribution amounts may not mean anything to you right now – especially if you are unsure where to even start.
The Different Types of Retirement Accounts
Now that we know how the 2019 contribution limits, we thought it would be a good time to talk about the individual account options that you may or may not be aware of having. Some of these terms may sound familiar, others may sound like a foreign language. It can be easy to get overwhelmed with all the different types of accounts. But don’t let that stop you from learning or reaching out to a trusted financial advisor. Whatever the case for you, here’s what you should know about each one.
Contribution Limits for 401(k) Plans
At the most basic level, a 401(k) plan is where you set aside a certain amount of your paycheck to be invested. The money is invested in various mutual funds, stocks, and bonds— depending on which type of investment you choose. Many of you have this option available to you through your employer.
The employer, in the case of a 401(k), is a for-profit business. The employer will be the one offering these plans, just as they are the ones who are signing the paychecks. However, the company that is in charge of keeping your actual account organized is referred to as the 401(k) Administrator. Think of these administrators as companies such as Fidelity or Vanguard.
If you leave your company, you have the option to roll over your 401(k) to a new account.
You will then have access to the money you have set aside when you are 59 ½. For those of you that want to wait a little longer, you can but you have to start withdrawing by the age of 70. On the flipside, there are penalties if you need to take an early withdrawal prior to reaching the 59 ½-age requirement.
There are exceptions to the withdrawal penalty to the 401(k) plan that are worth noting. There are circumstances in which you could have what’s considered a “hardship withdrawal” and therefore not be penalized should you need to withdraw funds. Each company is different and sets up the guidelines to how this works, so it’s important to understand the rules before going down with this path.
Generally speaking, there are 6 types of hardship circumstances that allow you to withdraw money from your account, without a tax penalty. Unexpected medical expenses, a down payment on a home, tuition, and fees related to a college education are typically considered a valid circumstance. You may also withdraw the money without penalty if you are using it to prevent going into foreclosure on your home, needing it for burial and funeral expenses, or to pay for extensive damage to your home.
You can also take out a hardship loan against your 401(k) if necessary, and those guidelines are typically set forth by the employer. This does require you pay the money back and each employer sets forth the requirements should you need to go this route.
But these are a handful of the guidelines in place when it comes to 401(k) plans. While there may appear to be quite a few boundaries set around these plans (and there are definitely plenty), there are also several advantages to utilizing a 401(k) plan.
First and foremost, you are lowering your tax-burden by setting aside money from each paycheck! This means that you won’t have to pay taxes on the money that you contribute to your 401(k) as you are contributing. Lowering your tax burden will hopefully allow you to pay less in taxes overall, which I think we can all agree is a bonus anytime. You will be taxed on the amount once you withdraw the money, but typically when you are older you are at a lower tax bracket then you are during your “saving” years.
Another advantage is that, depending on how you’ve invested and the rate of return you have, you could increase your earnings for retirement immensely. The idea is that over the years, the stocks and bonds that your money has been invested in will offer you additional returns. Certainly, nothing is guaranteed, but if you invest wisely you may be able to achieve growth in your account.
A third advantage is that many employers offer incentives for 401(k) plans such as matching a percentage with each paycheck or a one-time, annual contribution. This additional contribution can help you achieve your retirement goals even faster and ultimately helps doctors like you grow retirement tax accounts tax free.
With 401(k) plans, you can contribute to your account as long as you are working. This is different than other types of accounts that might have age limits on contributions.
Contribution Limits for 403(b) Plans
We spent quite a bit of time going into detail on the 401(k) since it’s such a popular plan, but many of you may be more familiar with the term 403(b). If you currently work for a public institution, such as a public hospital, teaching hospital, or some type of government agency, then the 403(b) plan option is typically the plan that is offered. This generally applies to doctors, nurses, ministers, professors, teachers, and administrators. The administrative costs and paperwork for these plans are lower, which is a major reason why it’s used by these types of professions.
There are many similarities between the 403(b) and the 401(k), so it’s beneficial to have an understanding of both. Actually, at first glance, these two plans may look almost identical to you.
The funds for a 403(b) can be automatically deducted from your paycheck. You still have the pre-tax advantage with this plan, just like the 401(k) plan. The contribution amounts that we went through earlier are the same for the plans as well. You may even be eligible to receive matching funds for the 403(b) through your employer.
However, upon closer inspection, there are a couple of distinct differences you should be mindful of as you are comparing plans.
The biggest difference between a 403(b) and a 401(k) is that you might not have as many investment options with the 403(b). As mentioned earlier, the 401(k) plans allow you to choose from a variety of mutual funds, stocks, and bonds. You typically do not see as many options within the 403(b) plans, and the options may even include annuities instead of mutual funds. This shouldn’t prohibit you from taking advantage of a 403(b) plan, but it is worth mentioning so you are fully aware.
Another noteworthy difference between the 403(b) and the 401(k) is the catch-up provisions (for those 50 and older) that are allowed under the 403(b). This is actually an advantage over the 401(k). Some employers allow the option that if you have worked for them for 15 years or longer, then you may contribute an additional $3,000 annually. This isn’t a requirement that an employer has to allow for it, but it’s definitely something you want to be made aware of as a potential option for contributions.
If you leave an organization where you have utilized a 403(b) plan, you can actually roll over the amount into a new 401(k) plan if you prefer.
Differences Between 457 Plans and 401(k) or 403(b) Plans
Although not as common, the 457 plans are another type of IRS-sanctioned retirement account. There are a few differences in a 457 plan versus a 401(k) or a 403(b) plan.
One difference is that a 457 plan is typically offered by local and state public employers, as well as some from the nonprofit sector. This type of employer-sponsored plan is common among police officers and firefighters. However, if you are an executive with a non-profit hospital then you may find the hospital offering this as well. If you recall, 401(k) is for employees of a for-profit business.
Another difference between the 457 plans and 401(k) plans is that you do not have the early withdrawal penalty if you take money out prior to age 59 ½. This could be a big advantage, depending on your financial circumstances. The other potential benefit the 457 plans can offer is when it comes to contributing under the “catch-up”.
If your employer offers a 457 plan, make sure to double check if they also offer any type of matching or annual contribution. This can be a great additional benefit to take advantage of and help put even more towards your retirement.
TSP Plans and Their Limitations
There is yet another type of retirement plan referred to as a TSP plan. This is short for Thrift Savings Plan and is the retirement savings option that is available for Federal Employees.
Like the private sector, funds can be matched and you have the ability to have your savings automatically deducted from your payroll.
Unlike the other plans, the TSP plans are limited in investment choices. There are only 6 investment choices when it comes to the TSP, unlike the multiple available for a 403(b) or 401(k).
IRA (Traditional and Roth) and Tax Advantages
If you’ve spent any time discussing retirement, which should be tied to one of the questions to ask a financial advisor by the way, then most likely the term “IRA” has been used. IRA is short for Individual Retirement Account. Think of an IRA account as a type of savings account but with tax advantages. All the income you earn from an IRA account (through mutual funds, stocks, and bonds) can grow without having taxes taken out. These accounts are subject to IRS guidelines and 2019 contribution limits, just like the other types of accounts.
IRAs are divided up into two categories: Traditional and Roth. Each one is distinct, and like the other types of plans, offer various tax incentives that you need to understand. There are quite a few details when it comes to comparing the two types of IRA accounts, but here is a general overview.
Traditional IRAs allow you to take advantage of tax deductions when you make the contribution. You would then pay taxes when you withdraw the funds for retirement (or whatever date you are targeting).
Roth IRAs offer a tax advantage when you withdraw the money. The idea is that you will probably be at a lower tax bracket when you retire, then when you were contributing throughout the years. You will, however, pay taxes on the contributions up front.
There are income and eligibility requirements so you will need to verify the details with a financial institution that offers the IRA. A financial advisor should be able to walk you through the details of the advantages of each type of IRA, which can churn opportunity from one of your potential biggest financial challenges. It’s not a one-size-fits-all approach and may actually change depending on which phase of your career you are in.
What You Need to Do Now
We know most of you are far from worrying about retirement, but when you get to that point, you’ll realize that there was never a magic retirement number. If you are in the midst of your days as a resident, then most likely you are concentrating on surviving on as little sleep as possible as well as figuring out how to maximize resident salary.
If sleep isn’t your issue, then paying down student loans is probably right up there with your financial decisions.
While it may seem far away, taking small, baby steps now can set you up for a much more successful retirement. With the 2019 contribution limits in place, now is a great time to take a few moments and ask yourself if you are maximizing your retirement benefit as much as possible. Are you leaving any money on the table by not taking advantage of these plans? Chances are, yes.
Make it a goal to set aside a certain amount of time to review what retirement plan is available to you now (if any at all). You owe it to your future self to see if there are any additional funds available to add to your retirement or lower your taxable income now.
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