Looking for a bigger tax break in 2019?
If you participate in a 401(k) plan, you are in luck. Contribution limits for 401(k) plans have been raised for 2019, giving you the opportunity to shelter more of your income from taxes. Even if you can't afford to take full advantage of the higher 2019 401(k) contribution limits, this is a good time to revisit your retirement saving strategy to take as much advantage of your 401(k) plan as you can.
401(k) contribution limits for 2019
The 401(k) contribution limits for 2019 have been raised to $19,000, up $500 from $18,500 in 2018. If you are over 50, you are allowed to make an additional catch-up contribution of as much as $6,000, pushing your total 401(k) contribution limit for 2019 to $25,000.
Your 401(k) contributions offer a double tax advantage. You can direct pre-tax dollars from your paycheck into your 401(k), thus reducing the amount of your income that will be subject to income tax next year. Also, any investment earnings on your 401(k) contributions will also be exempt from taxes.
You will have to pay income taxes on the money when you take it out of the 401(k) in retirement; but you may find that your income is lower in retirement than in your working years, in which case you would be in a lower tax bracket then as well. Also, to some extent, you can manage the timing of your 401(k) withdrawals to increase tax efficiency.
A $19,000 contribution limit for 2019 should be an easy figure to remember -- $19K in '19. The most important thing is to remember to take advantage of it.
How to maximize your 2019 401(k) contribution
Here are some tips for making the most of your 401(k) contributions in 2019:
- Sprint to the finish if you are over 50
If you are aged 50 or older, look to take advantage of both the increased 401(k) contribution limit and the catch-up contribution.
According to the Bureau of Labor Statistics, the years around age 50 are generally a person's peak earning years. That means you have the most financial means to contribute to your 401(k) plan. You also have the ability to take advantage of catch-up contributions to defer as much as $25,000 to your 401(k) plan next year. So, with retirement age coming closer, now is the time to start salting away some serious retirement wealth.
- Even if you can't max out your contributions, this is your cue to step it up
The new contribution limit of $19,000 may be out of reach for many people; but even if you can't contribute that much, the increase in the contribution limit is a good cue to bump up what you contributed last year. In part, 401(k) contribution limits are increased periodically to keep up with inflation. This is a good reason why you should steadily increase your contribution level from year to year.
While you should contribute as much as you can to your 401(k), be careful not to overreach and leave yourself needing to get some of that money back. There is a 10 percent penalty (on top of ordinary income taxes) on 401(k) withdrawals prior to age 59 1/2, and there are even potential negative consequences to borrowing from your 401(k).
- Have you visited a retirement calculator lately?
When considering how much to contribute to your 401(k) plan for 2019, a good place to start is with a retirement calculator. Projecting how much you are on track to save for retirement can provide a vision of your future that gives you good incentive to contribute to your 401(k) plan. Even if you have used a retirement calculator in the past, it is wise to revisit your calculations once a year to see where you stand.
- At a minimum, make the maximum of employer matching contributions
Still not sure how much to contribute to your 401(k) in 2019?
If your employer provides matching contributions, then at minimum your goal should be to contribute at least enough to qualify for the maximum matching dollars available. For example, many employers will match half of what the employee puts into the plan, up to 6 percent of the employee's income. In that case, you should make sure you contribute at last 6 percent to your plan, to make sure you don't leave any money on the table.
To learn more about matching contributions, read: Does your employer's 401(k) measure up?
- Plan for income irregularities
When planning your 401(k) contributions for 2019, work with your employer's benefits office to account for any income irregularities you might encounter. For example, if you are paid on commission or are eligible for an annual bonus, you may want to shoot for a different 401(k) contribution pattern than if you earned the same amount week-in and week-out.
As opposed to traditional pensions, 401(k) plans put the primary onus on each individual employee to save enough for retirement. The tax advantages of 401(k) plans -- and, in many cases, the matching contributions offered by employers -- give you added incentive to do so.
The tax incentive to save in a 401(k) plan has never been higher than in 2019. On top of that, the ultimate incentive is to build retirement wealth. However, you only have so many years to save for retirement, so treat each one of them as something precious. Add to your 401(k) contributions now so you can thank yourself later.
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