Retirement savers will be allowed to tuck away more money in their tax-efficient accounts next year.
The Internal Revenue Service announced Thursday it will raise the amount that Americans are allowed to contribute to their employer-sponsored 401(k) plans and IRAs in 2019. Contribution limits are increasing as part of a cost of living adjustment, according to the IRS press release.
So where will you see the changes?
Employer-sponsored retirement plans
Many companies offer employees the opportunity to participate in a work-sponsored retirement plan, in which your employer takes money out of your paycheck to help you invest in the account. Those who take advantage of a 401(k) — as well as the less popular 403(b) and most 457 plans — will be allowed to contribute as much as $19,000 next year, up from $18,500 in 2018.
In addition, workers who are 50 and older may contribute an additional $6,000 to their retirement plans for a total of $25,000. This is known as a “catch-up contribution.”
Individual retirement plans
People can save even more for retirement by opening an IRA. This type of retirement account is not connected to a company’s retirement plan, so savers won’t receive an employer match, as is the case with some 401(k)s.
The two most popular types of IRAs include:
- Traditional IRA accounts: Qualified contributions are deductible, with taxes due when you take money out of the account, typically in retirement.
- Roth IRAs: You pay taxes up front, then qualified distributions are tax-free in retirement.
The total contribution limit for both of these IRA accounts will increase to $6,000 for the first time in six years, up from $5,500 in 2013. The catch-up contribution is $1,000, so people who are 50 or older can save a total of $7,000 in IRAs.
One thing to note: Tax deductions for traditional IRA contributions have income phase-out ranges, depending on how much the taxpayer makes and if their employer provides a work-sponsored retirement program. In other words, if either the individual taxpayer or their spouse is covered by a work-sponsored retirement plan during the tax year, like a 401(k), their contribution deductions could be reduced (or “phased out”) until it’s eliminated, depending on income. Of course, if neither you nor your spouse is covered by a work-sponsored retirement plan, then these phase-out ranges won’t apply.
For example, as of 2019, single taxpayers who participate in a work-sponsored retirement plan like a 401(k) will see the amount of money they can contribute to a traditional IRA phased out if they make between $64,000 and $74,000 per year.
Roth IRAs have different income phase-out ranges.
For example, the income phase-out for taxpayers who make contributions to a Roth IRA contributions is now $122,000 and $137,000, up from $120,000 to $135,000. That applies to single contributors and heads of household.
For both traditional IRAs and Roth IRAs, there are additional scenarios for married couples depending on filing status and income. Check the IRS website for more details.