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New Limits on Retirement Plan Contributions

IRS cost-of-living increases mean savers can put more away

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En español | Savers can put away even more money in tax-deferred retirement accounts in 2019, thanks to cost-of-living adjustments recently announced by the Internal Revenue Service. 

The annual limit for employees who participate in a 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan (TSP) will increase from $18,500 to $19,000 for 2019. The limit on contributions to an IRA will rise from $5,500 to $6,000, the first increase since 2013. 

And, for those age 50 and older, the catch-up contribution limit for IRAs remains at $1,000; the catch-up contribution for those who participate in 401(k), 403(b), most 457 plans and the federal TSP remains unchanged at $6,000. Catch-up contributions are annual opportunities for those 50 and older to make extra contributions to their retirement plans. Catch-up contributions are not indexed for inflation and are not subject to cost-of-living adjustments.

Maxing out in 2018

As the end of 2018 approaches, those 50 and older can take advantage of the current year’s contribution limits, if they have not already done so, as well as the catch-up contributions. 

“If you’ve got the available cash flow, maxing out your 401(k) makes a lot of sense,” said certified financial planner Andrew Feldman, president of AJ Feldman Financial in Deerfield, Ill.

That could mean increasing now the percentage of your salary that goes into your retirement account tax deferred. Or you could increase the amount you contribute to your 401(k).

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Those who are looking ahead to retirement but who are still working at a salary that puts them in a higher tax bracket today than they will be once they retire might want to make changes in their contributions before the end of the year.

“If you think you’re going to be in a lower tax bracket in retirement, deferring taxes today while you’re in a higher tax bracket today is beneficial,” Feldman said. “It’s all depending on your circumstance. There is no single answer.”

For example, in 2018, you can still contribute $18,500 to a 401(k), 403(b), most 457 plans and the federal government’s TSP in total before the year ends. In addition, if you are 50 or older, you can contribute an additional $6,000 in a catch-up contribution for a total of $24,500 during 2018.

No loss to Social Security wages   

Those who have not yet claimed Social Security will not lose earnings that count toward future Social Security benefits by increasing the contribution to their retirement account. The retirement funds are contributed on a pretax basis, which means you don’t pay federal tax (and state, if your state has state income tax) on that portion of your income. However, those contributions are included as wages subject to Social Security and Medicare taxes.

Your 401(k) contributions “reduce your taxable income but they do not reduce the amount of wages on which you pay Social Security tax,” said St. Louis certified public accountant Mike Piper, “and therefore they do not reduce the amount of wages that get included in your earnings record when ultimately calculating your Social Security benefit.” 

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