As we head into a new year, this a good time to review your cash flow and savings for 2019 to ensure you are maximizing your benefits. In November, the IRS announced a $500 annual increase of retirement plan contribution limits for 2019. This includes common university and physician group sponsored retirement options such as 401(k), 403(b), and 457 plans. The new limits are $19,000, up from $18,500 in 2018. For employees over 50 years of age, the special catch-up benefit remains $6,000 for employer plans. As the limits for 457 plans are independent of 401(k) or 403(b) plans, this means an employee over 50 years old could contribute $25,000 to their 403(b) and an additional $25,000 to their 457 plan.
While many private employers with 401(k) plans only provide one or two open enrollment opportunities per year to make contribution changes, most universities allow for contribution changes to be made at any point in the year. This typically involves submitting a Salary Reduction Agreement form to your Human Resources or Employee Benefits department. This flexibility makes it easier to adjust your savings based on your personal financial situation and cash flow. It is important to remember that contributions into your employer plans must come from payroll withholdings and must occur in the calendar year. This means that you need to plan ahead if you intend to maximize your contributions into your retirement plans.
The contributions made to traditional employer plans are made with pre-income tax dollars, lowering your taxable income for the year of the contribution. The investments are not subjected to income tax until they are withdrawn. These increases also apply to the Roth options that many employers now offer. You do not receive the same reduction of income taxes with a Roth 401(k), 403(b) or 457 account, as contributions are made with after-tax dollars. However, there is no tax on these accounts when drawn upon in retirement like there is for their traditional plan cousins.
You can contribute to both a Traditional and Roth version of a plan, however, they are combined for purposes of the annual limit. For example, if Charlotte, age 48, wished to split her 403(b) contributions evenly between a traditional, pre-tax 403(b) and an after-tax Roth 403(b), $9,500 could go into each account, up to the limit of $19,000.
If you or your spouse do not have an employer sponsored plan, you may be eligible to use a Traditional or Roth IRA account. The good news is that the $500 annual increase applies to these accounts as well. For IRA and Roth IRA contributions, the limit is now $6,000, up from $5,500. They also have an age 50 catch-up provision of $1,000, for a maximum contribution of $7,000. You also have longer to decide on your IRA or Roth IRA contributions. While employer sponsored plans must be made in the same calendar year, you have until April of the following year to decide your IRA or Roth IRA amounts.
All information herein has been prepared solely for informational purposes only and opinions are subject to change. Past performance is not indicative of future results and all investments involve the risk of loss of principle. For information on how these general principles apply to your situation, consult an investment professional.