August 16, 2019
Someone once said, “Retirement is wonderful if you have two essentials – much to live on and much to live for.” I’m not sure who said this, but these words perfectly sum up why I do what I do every day; helping folks retire with not only enough money, but with a sense of purpose and anticipation for the next chapter of their lives. I must tell you, this is beyond rewarding, but there’s a reason this is called “work.” It takes hard work to accumulate enough assets to retire. What can be even harder is designing and deploying a viable plan for how you’ll spend your time and savings once you make that transition from your accumulation to your distribution stage of your financial life.
Luckily, we have tools at our disposal to help us prepare, at least financially. One such tool is the ability for employers to offer retirement savings plans under which eligible individuals can have contributions automatically deducted from their paychecks and deposited to their 401(k) and similar types of retirement accounts. While setting up these contributions on auto-pilot can be a good idea, the arrangement should be reviewed each year to help ensure that it continues to be sufficient to meet the desired goal, which includes adjusting for inflation and regulatory changes. Individuals who are already contributing the maximum possible amounts should check each year to see if the statutory limits have been increased, and whether they want to increase their contribution rates.
An annual review is often necessary, as many of us unwittingly end up underfunding our retirement nest egg, despite our best intentions to do otherwise. This can have dire consequences when we are ready to retire, if we discover that we’re far behind on our savings and investment goals. In some cases, it might be impossible to make up the lost ground, requiring us re-think our idea of retirement and the lifestyle we envisioned- to the point of even postponing retirement or being able to afford to retire at all.
So today – with personal contributions being a primary way of funding retirement nest eggs, let’s dig into the personal contribution limits the IRS has set for individuals who want to contribute to their retirement savings plans. Understanding these limits is vital to making sure that you’ve maximized their potential to help you save for your retirement, and avoiding penalties which could be owed by exceeding the limits.
For 2019, the maximum contribution the IRS allows individuals to make to their employer sponsored retirement plans, such as a 401(k), 403(b), is $19,000. That’s $500 more than last year, a cost of living increase. Individuals 50 and over may add $6,000 more per year in catch-up contributions – the catch-up amount hasn’t changed over 2018. If you have a governmental 457(b) account, you can add the same amounts ($19,000, plus catch up of $6,000 if eligible) to your 457(b) account)
If you have multiple 401(k) and 403(b) accounts – whether traditional 401(k) and/or Roth– your aggregate contributions to all of them may not exceed the $19,000 deferral plus $6,000 catch-up limit imposed by the IRS. You can split contributions between those accounts, as long as you do not exceed the deferral limit (IRAs do not count against that limit). You’ll want your investment goals and needs to help guide your decision here.
Of course, one of the most popular features of the 401(k) plan is the ability for your employer to match contributions that you make to your account. Employers may also make non-elective/profit sharing contributions. The IRS imposes a total annual contribution limit to all your accounts in plans maintained by one employer.
For 2019, that total contribution limit may not exceed 100% of the participant’s compensation, or $56,000 ($62,000 for those eligible for catch-up contributions). The amount of compensation that can be taken into account when determining employer and employee contributions is limited to $280,000 for 2019.
IRAs got a contribution bump up in 2019, too – the first time it’s happened since 2013. The maximum contribution this year is $6,000, up from $5,500 in 2018. Catchup contributions add another $1,000 for individuals age 50 and older, to $7,000 per year. That applies to both traditional and Roth IRAs.
If you are covered under a retirement plan at work, tax deductibility for your Traditional IRA contributions is phased out based on your Modified Adjusted Gross Income (MAGI). The MAGI limit depends on your tax filing status. For instance, an individual who files as single and has a MAGI of $64,000 or less in 2019 may take a full deduction of his/her 2019 Traditional contribution. No deduction is allowed for MAGI of $74,000 for more. For those who file as married filing jointly, the range is: $103,000 or less for fully deductibility, and no deductibility for MAGI of $123,000 or more. Those whose MAGI fall within the minimum and maximum range is permitted a partial deductibility for their traditional IRA contributions.
The IRS also imposes MAGI limits to restrict contributions to Roth IRAs by high-earning individuals. The MAGI limits are based on tax filing status. For someone who files as single, a full contribution for 2019 is permitted if the 2019 MAGI is $122,000 or less; and no contribution is permitted if the MAGI exceeds $137,000. For married filing jointly, the MAGI range is $193,000 to $203,000. Those who fall within the minimum and maximum range is permitted a partial Roth IRA contribution.
These retirement vehicles provide many of us with essential retirement savings options. But because of their tax-advantaged status, their contribution and eligibility limits can be confusing for investors to navigate. That’s at least part of the reason why very few employees – 13% – ever reach the statutory maximum contribution limit, according to Vanguard.
However, contribution limits don’t have to stop informed and strategic-thinking investors from finding effective ways to save for retirement. For example, the IRS imposes no restrictions on investors who put their money into non-retirement investment accounts. There are few eligibility requirements, no limits how much an individual may contribute, and no restrictions on when individuals can withdraw their money.
Of course, earnings on regular investment accounts are taxable. You pay taxes on interest and dividends for the year they’re issued, and if you sell your investments for a profit, you may be required to pay capital gains tax, and a higher rate is imposed if you’ve held the investment for less than a year. Despite the tax liability, regular investment accounts sometimes provide investors with a greater variety of investment choices than they typically have in 401(k) plans or IRAs.
If it’s been a while since you’ve examined how much you’re contributing to your employer-sponsored retirement savings plans or other financial tools you’re using to prepare for retirement, now is a good time to revisit. You may find that with some simple and relatively painless adjustments to your contributions, you will be able to save and invest even more to help prepare for your retirement.
Regardless of what financial vehicles you use, your retirement investment strategy must be aligned with your financial goals, your time frame, and your appetite for risk. And part of determining your financial goals is envisioning how you’ll spend your retirement – as well as your retirement dollars. Any investment strategy exposes you to potential risk, but it’s appropriate to reduce risk as you approach retirement age.
Folks, make sure you seek out investment solutions that employs downside risk mitigation techniques. You see, managing the downside is crucial in both the accumulation and distribution phases of your financial lifecycle. It is critical in the distribution years since it may help to preserve your wealth during periods of market turbulence.
Be vigilant and stay alert, because you deserve more.
Have a great week!
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC
Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at firstname.lastname@example.org.
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