Although we assume many of our readers know what a 401(k) and an IRA are, let’s cover these quickly.
What is a 401(k)?
401(k) retirement, savings, and investment accounts are places to store money in which your contributions are typically matched - a portion of those earnings, usually not all of them in dollar-for-dollar fashion - by your employer. These plans are named after the section of the Internal Revenue Code - 401(k) - that lays out the rules for these plans.
There are other benefits that 401(k) plans bring to the table, such as not having to pay money on the growth of your 401(k) account over the years. You don't have to pay any taxes on the money you contribute to your 401(k) account once you wait to withdraw such money until you are 59.5 years of age.
What is an IRA?
IRA is short for Individual Retirement Account, which is a type of savings account that is one of the most popular kinds in its class across the United States.
Individual Retirement Accounts are similar to bank accounts, though they can be used to purchase things like stocks, mutual funds, other financial instruments, and investments of all sorts. Further, IRAs bring tax breaks to the table that are different than those associated with the 401(k) plan.
Now that you understand what a 401(k) plan and an IRA are, let's check up on this year's changes to the 401(k) account's contribution limit
Put simply, Americans who are saving for retirement will be able to fork over an extra $500 to their 401(k) accounts and their Individual Retirement Accounts.
401(k), 403(b), and 457 accounts, as well as the Thrift Savings Plan, will be legally able to shelter $19,000 in earnings in 2019. This is an increase from last year's cap of $18,500. Thanks to this change, employees across the country will be able to put off paying income tax on roughly $42 if they take advantage of it by actually putting in $19,000 this year instead of just $18,500.
Workers who are of at least 50 years of age will be able to put back a maximum of $25,000 to such accounts in 2019, which is up from the cap of $24,500 from last year.
The 2019 Individual Retirement Account Contribution Amount
In 2018, the IRA contribution cut-off was $5,500. It had remained at this amount since 2013. This year's $500 increase in the maximum contribution one can put in in a year's time.
American workers who are of age 50 or greater will not be able to store more money to their Individual Retirement Accounts in their later years in a greater amount than what was available in previous years. The catch-up contribution cap for the Individual Retirement Account will stay true at $1,000.
Traditional IRA Changes
People who own 401(k) accounts can't claim tax deductions on their contributions for 2019 if their earnings are more than $74,000 or $123,000 in a year if they're filing individually or as married couples. Each of the amounts increased $1,000 this year and $2,000 this year, respectively. The tax deduction starts being phased out at the amounts of $64,000 and $103,000 for 2019.
Roth IRA changes
This year, the ceiling for Roth IRA contributions after taxes have been deducted rose $2,000 this year for individuals and $4,000 this year for married couples filing jointly.
People making $137,000 individually or $203,000 as married couples can't contribute to Roth IRAs. Their abilities to contribute start to be phased out at the dollar values of $122,000 and $193,000 for individuals and married couples, respectively.
As you are working, you are in the “accumulation” phase of your life. Remember, you need to plan for the “de-cumulation” phase as well, those are your retirement years. We are here to help guide you as you approach retirement and guide you through your retirement years.
This material is for general information and is not intended to provide specific tax or legal advice or recommendations for any individual.