It was difficult to pay attention to anything but the runup to the midterm elections last week, but something very important happened: The IRS raised the annual contribution limits for retirement savings accounts due to cost-of-living adjustments.
Beginning next year, the maximum contribution to your individual retirement account (IRA) increases from $5,500 a year to $6,000 a year; that change covers both Roth and individual IRAs. (The limit does not apply to rollover contributions.) And 401(k) limits also went up; employee contributions rose $500 per year, from $18,500 to $19,000, and the total contributions from combined employer and employee increased to $56,000.
Catch-up contributions – an extra $1,000 allowed to IRAs and an extra $6,000 allowed for 401(k)s for those who are 50 and over – did not increase.
Those who contribute to health savings accounts (HSAs) also got a small increase in their maximums, $50 higher for individual contributions (for a total of $3,500) and $100 higher for family contributions (for a total of $7,000).
“If you stack 401(k) contributions on top of an IRA or Roth IRA contribution as well as maxing out the catch-up contributions, all of a sudden you are at $32,000 per year in allowable savings,” writes personal finance reporter David Rae in Forbes. “This is great news for the vast number of Americans who are behind when it comes to saving for retirement.”
Small business owners and other self-employed people who save using a Solo 401(k) or SEP IRA also can contribute $1,000 more than previously allowed, raising the limit from $55,000 annually to $56,000 annually, depending on what contributions are made as employer and as employee.
“We are still waiting for announcements for other 2019 inflation adjustments,” Rae writes. “This will include important information like federal income-tax brackets and potential changes to the standard deduction. We may also see changes to the person exemption from the estate tax.”
If you are early in your career or for some reason have not contributed to a retirement savings plan in the past, there is no better time to do it. At minimum, if you work at a company that offers a 401(k) match, you should contribute the amount your company matches. It’s like getting a raise without doing any extra work – and it pays off for decades.
“If you work for a company that offers any kind of 401(k) match, contribute enough to take full advantage of it,” writes U.S. News & World Report. “Say your company offers a dollar-for-dollar match on up to 3 percent of your income. You should contribute at least 3 percent, which will result in a total 6 percent contribution to your 401(k) plan after including the match. You should always deduct enough from each paycheck to get your employer’s full match. If not, you’re passing up free money.”
And that’s never a good investment strategy.