• Skip to main content
  • Skip to primary sidebar
  • Skip to footer
MENUMENU
  • Home
  • About Us
    • Our Philosophy
    • Choosing a Financial Planner
    • Legal and Regulatory
    • Team
    • Careers
    • Awards & Recognition
    • Contact Us
  • Our Services
    • Financial Planning
    • Ongoing Financial Guidance
    • Portfolio Management
  • Financial Planning Basics
    • Continuing Care Retirement Communities (CCRCs)
    • Retirement Planning and Cash Flow
    • Social Security
    • Taxes
    • Insurance & Risk Management
    • Investments
    • 401(k)
    • Real Estate
    • College
    • Liquidity
    • Divorce
    • Estate Planning
    • Sensible Updates
  • Resources
    • Blog
    • Financial Planning for Older Adults
    • Webinars
    • Videos
    • Financial Planning Guidebook
    • Continuing Care Retirement Communities Guidebook
    • Primers
    • Financial Planning Links
    • Client Login
  • Contact Us
Sensible Financial Planning

Sensible Financial Planning

Follow Us

  • Facebook
  • LinkedIn
  • Twitter
Client Login

Call Us Today
781-642-0890

The IRS Announced Higher 401k And IRA Contribution Limits For 2019 – How Much Should You Save?

by
Rick Miller
Ph.D., CFP® - Founder

November 27, 2018

This article originally appeared on Forbes.com.

On November 1, the IRS announced cost of living increases to IRA and employer plan contribution limits for 2019. The IRA annual limit increased from $5,500 to $6,000; the employer plan limit (applicable to 401(k)s, 403(b)s, most 457 plans and the Federal Government’s Thrift Savings Plan or TSP) increased from $18,500 to $19,000. Those are just the headlines.

Together, Congress and the IRS have presided over large changes in retirement contribution limits. In 2018 dollars, the IRA contribution has been as small as $2,917 in 2001 up to about $6,000 since 2008. The employer plan limit has been as low as $15,249 in 1997 and as high as $19,000 since 2006.

Regardless of inflation, employees of firms offering retirement plans have a much larger tax deferred savings opportunity. Each year, they can shelter from tax 3 times as much (3 times!) as workers whose best tax-sheltered retirement savings option is their IRA.

How does this affect your retirement savings plan? How should you respond?

Consider the source(s).

The IRS is following Congressional instructions (Economic Growth and Tax Relief Reconciliation Act of 2001, or EGTRRA) to maintain the purchasing power of both contribution limits.

That is, the IRS is making the changes the Congress told them to make, ensuring that the limits keep up with inflation.

Last time I looked, neither the Congress nor the IRS was a financial planner, or a financial advisor of any kind. They don’t know you or your financial situation, and they’re only vaguely interested in your financial success.

The IRS is in the business of collecting all the taxes they can. These increased contribution limits just make their job a little bit harder – there will be less income to tax. Members of Congress are in the business of being re-elected. The link between your retirement savings and their election prospects is tenuous at best.

It doesn’t take much analysis to see that these changes don’t provide much guidance about what you should do. Let’s do some “supposing.”

Suppose Jim works for an employer offering a 401(k) plan, and earns $50,000 per year, pre-tax. Should he “max out” his contributions? Let’s see, $19,000 is almost 40% of $50,000 – what do you think?

Some very rough analysis (see table) shows that if Jim saves $19,000 a year and retires at 65, he would have $25,086 in after-tax income before retiring versus $40,179 in retirement. Similarly, if Jane earns $100,000 a year with a non-401(k) employer and limits her retirement savings to the IRA maximum of $6,000 per year, she would have $72,371 in after-tax income before retiring versus $35,309 in retirement.

Neither one is likely to be happy with their choice. Jim scrimps and saves throughout his working life to have 60% more income after retirement. Jane can live the high life while working but her spendable income drops by half after she retires. In practice, Jim should save less than his allowable maximum, and Jane a good deal more.

Summarizing, the contribution limit increases change what you can do, not what you should do.

If saving based on the contribution limits is not good strategy, what is? Should you save more? Less?

Unfortunately, there is no simple answer. [Actually, there is one simple answer, just not for the questions immediately above. If your employer matches your contributions, be sure to contribute enough to get the full match.] If you want to retire comfortably when you choose to, thinking carefully about your retirement savings, both tax advantaged and taxable, is the only way to go. Factors that will influence the right answer for you include (at least): when you hope to retire, your annual income, your income history, how much you’ve saved so far and whether you own your home.

You will need to save a higher percentage of your income:

  • To retire earlier, because your savings must cover more years of retirement.
  • If your earnings are higher, because Social Security benefits will replace a smaller proportion of your income.
  • If you haven’t saved much yet, because you are making up for lost time.
  • If you rent rather than own, because home owners’ home equity is like prepaid rent – a “hidden” component of retirement savings.

“How much should I save for retirement?” is a very personal question. The answer is almost certainly not the IRA or employer plan contribution limit.

Forbes has full details on the 2019 limits for 401(k)s and more here.

Note: Both IRA and retirement plan contribution limits varied even more widely before the Tax Reform Act (TRA) of 1986.

More articles by Rick Miller Filed Under: Financial Planning Basics Tagged With: 401(k), Forbes.com

Primary Sidebar

Sign up for our newsletter

Recent Posts

The picture shows a college campus and students because the article is about FAFSA.

The FAFSA Simplification Act and Financial Aid

The FAFSA Simplification Act makes adjustments to the FAFSA. How will it affect your college student and their financial aid?

The picture shows an older couple hiking on a beautiful day to represent retirement and the SECURE Act.

The SECURE Act 2.0 and Retirement

The SECURE Act 2.0 builds on the initial SECURE Act of 2019, changing the retirement planning space, and increasing retirement flexibility.

Categories

  • College Planning
  • Cybersecurity
  • Estate Planning
  • Financial Planning Basics
  • Financial Planning Videos
  • Insurance & Risk Management
  • Investments
  • Retirement Planning and Cash Flow
  • Sensible Updates

Topics

401(k) Annuities bond returns Bonds Charitable Giving College Planning Company Updates Credit Health Disability Insurance diversification Divorce Donor Advised Funds Economy estate planning Federal Reserve Financial Goals Financial IQ financial planning Financial Strategy Forbes.com housing inflation Investments Investment Strategy IRA Legislation Liquidity Long-Term Care Medicare Mortgage Older Adult Living Recommended Books remote work Retirement Choices retirement planning Retirement Savings Risk Management Securities Social Security Social Security benefits Staff News Stock Market Stocks sustainable portfolios taxes

authors

Rick Miller
Sensible Staff
Frank Napolitano
Rick Fine
Josh Trubow
Chris Andrysiak
Marie St. Clare
Laura Williams
Gyb Spilsbury
Chuck Luce
Aimee Plouffe Polley

Footer

Services

  • Financial Planning
  • Financial Guidance
  • Portfolio Management

About Us

  • Our Philosophy
  • Team

Resources

  • Blog
  • Financial Planning Guidebook
Sign up for our Newsletter
Awards & Recognition

Follow Us

  • Facebook
  • LinkedIn
  • Twitter

Locations

Massachusetts

203 Crescent Street, Suite 404

Waltham, MA 02453

Phone: (781) 642-0890
Fax: (781) 810-4830

 

California

600 B Street, Suite 300

San Diego, CA 92101

Phone: (619) 573-4131​

Disclaimer

This content reflects the opinions of Sensible Financial®. We may change it at any time without notice. We provide this content for informational purposes only. Although we endeavor to keep the information up-to-date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability for a particular purpose or availability with respect to the website or the information, products, services, or related graphics contained on the website for any purpose. We do not intend the information contained in this website as investment advice and we do not recommend that you buy or sell any security. We do not guarantee that our statements, opinions or forecasts will prove to be correct. Past performance does not guarantee future results. You cannot invest directly in any index. If you attempt to mimic the performance of an index, you will incur fees and expenses which will reduce returns. All investing involves risk. You can lose any money you invest. There is no guarantee that any investment plan or strategy will succeed.

More important additional information and full disclaimer.

Copyright © 2023 Sensible Financial · All Rights Are Reserved
Legal Disclosure