Maximizing Your Retirement Savings in 2019

Coin stackLast week we had a client come into the office, let’s call her Lois. Lois is 67, a widower, has two grown kids, lives in Mashpee, and is a real hot ticket. She walked right in and said in her energetic voice that carried through our small office, “Jeff, tell me something good!!” As I was thinking about what to write for this week’s article, I heard Lois’s voice in my mind—tell me something good. It seems hard to believe but the New Year is right around the corner. What financial news could I share now that would bring positive thoughts for 2019?

Then I thought of the IRA contributions for 2019. It may seem like a small thing, but the IRA contributions have not increased since 2013. This increase is good news. Even a small amount invested in your IRA with the benefit of compounding interest can have a real positive effect on your nest egg. The Internal Revenue Service has increased 2019 contribution limits for various retirement accounts. The adjustments you can make to your retirement savings in 2019 will pay dividends for you in the years ahead. There’s a lot of numbers to cover, so let’s get started.

First of all, if you’re eligible to contribute in a 401(k), 403(b), or 457 plan, your contribution limit has increased from $18,500 to $19,000. The same contribution limit also applies to those civil service workers eligible for the government’s Thrift Savings Plan.

Bear in mind these limits do not apply to matching contributions or profit-sharing from your employer. The limit of total employer plus employee contributions to all defined contribution plans increases $1,000 in 2019, from $55,000 to $56,000.

For the first time since 2013, the contribution limit rises on Individual Retirement Accounts (IRAs). It’s up $500 for 2019, from $5,500 to $6,000. That applies to both traditional and Roth IRAs. SIMPLE 401(k) and SIMPLE IRA plans also see a $500 contribution limit for 2019, from $12,500 to $13,000.

The Modified Adjusted Gross Income (MAGI) limit for contributing the maximum to a Roth IRA changes in 2019. The 2019 income limit for singles is $122,000, up $2,000. The limit for married couples filing jointly rises $4,000 to $193,000. Phase out for Roth IRA contributions caps at $137,000 for singles, $203,000 for married filing jointly, up $2,000 and $4,000 respectively.

Higher-earning employees discover their contribution to employer retirement plans can be limited because their compensation exceeds the Highly Compensated Employee (HCE) threshold. For 2018, HCE was $120,000. It goes up $5,000 to $125,000 in 2019.

While contribution limits have increased for 2019, “catch up” contribution limits for 401(k) and IRA contributors age 50 or above remain the same: $6,000 additional for 401(k) plans, an additional $1,000 for IRAs. Contribution limits to SIMPLE 401(k) and SIMPLE IRA plans also remain the same for 2019 at $3,000.

Speaking of IRAs, the income limit changes to take a full tax deduction in 2019. If you’re contributing to a traditional IRA and you’re participating in a workplace retirement plan, the deduction limit increases from $63,000 to $64,000 for individuals, up $1,000. For married couples filing jointly, it bumps up from $101,000 to $103,000, a $2,000 rise — similarly, the 2019 deduction phases out completely for individuals and married couples filing jointly at $74,000 and $123,000 (up $1,000 and $2,000 respectively from 2018).

Similarly, if you contribute to an IRA and are not covered by a workplace retirement plan but your spouse is, the income limit changes to take a full deduction in 2019. It goes up $4,000 for married couples filing jointly, from $189,000 to $193,000. The deduction phases out $4,000 higher in 2019, at $203,000.

When paired with a High Deductible Health Plan (HDHP), a Health Savings Account (HSA) provides a tax-free way to pay costs associated with health care at any age. In fact, HDHP-HSA plans are a rapidly-growing segment of the health insurance market. According to America’s Health Insurance Plans (AHIP) enrollment in HDHP-HSAs is steadily increasing 1 to 2 million enrollees per year, jumping 9.2 percent alone between 2016 and 2017.

That triple tax advantage employed by the HSA can make it an appropriate retirement savings tool for many. Contributions are tax-deductible (or pre-tax if contributed from payroll), the balance grows tax-free and rolls over from year to year, and withdrawal for qualified medical expenses is tax-free. With the high cost of health care in retirement of paramount concern to many of us, having savings in a tax-advantaged way to pay those bills can be a huge benefit.

If you are enrolled in an HDHP-HSA plan for 2019, please be aware that the contribution limit rises from $3,450 to $3,500 for single coverage, $6,900 to $7,000 for family coverage.

Now that we’re at the end of the year, it’s a good time to take stock of what changes you can make to impact your retirement savings positively. Obviously, none of these changes on their own will secure your retirement future. Some seem superficial and incremental, little more than inflation adjustments and other modest increases.

But I encourage you to look at the big picture here: Applied with the appropriate investment strategy to suit your specific goals, these changes make it easier for you to save and invest in your future. So they certainly merit your time and your analysis to see if they make sense for you.

Especially if retirement is still years away from you, don’t underestimate the power of the interest you earn over time just on these incremental savings changes. Compound interest is one of the fundamental building blocks of wealth, regardless of whether you’re an individual investor or one of the biggest, like Warren Buffett. Even Albert Einstein is said to have paid tribute to it with his famous quote: “He who understands compound interest earns it, he who doesn’t pays it.”

As 2018 draws to a close and the curtain begins to peel back on 2019, start on the right foot by bolstering your retirement savings plans with gradual changes that help keep you on the right course to retirement. Many of these changes, spread out over time, can be made with negligible impact on your income. As I tell my kids, it’s the little things in life that make the biggest difference.

Now’s the right time to be vigilant and stay alert, because you deserve more.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, a wealth management firm with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at jeff@old.cutterfinancialgroup.com.

Cutter Financial Group LLC (“Cutter Financial”) is a SEC Registered Investment Advisor.

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