6 Ways the New Tax Rules Affect Your Retirement
The IRS recently announced that next year you can save more in different types of tax-advantaged retirement plans. Find out six ways the new tax rules affect your retirement.
While you may not like to hear that the cost of living in the U.S. continues to go up every year, there’s an upside for your retirement savings. Every fall, the Internal Revenue Service (IRS) evaluates whether to increase retirement plan contributions and benefits to keep up with those cost-of-living increases.
The IRS recently announced that next year you can save more in different types of tax-advantaged retirement plans. In this post, I’ll review six ways the new tax rules affect your retirement in 2019 so you can build a bigger nest egg.
6 Ways New Tax Rules Affect Your Retirement in 2019
- You can contribute more to a workplace retirement plan.
- Your employer can contribute more retirement matching funds.
- You can contribute more to an individual retirement plan.
- You’re eligible for more tax deductions with higher income.
- You’re eligible for a Roth IRA with higher income.
- You can contribute more to a retirement plan if you’re self-employed.
Here’s the detail on each updated retirement benefit that you should take advantage of starting next year.
1. You can contribute more to a workplace retirement plan.
Using a retirement plan offered by an employer is the most popular way Americans save for retirement. Depending on where you work, you might have the option to participate in a 401(k), a 403(b), a 457, or a thrift savings plan (TSP).
As an employee, your base contribution limit will increase $500, from $18,500 to $19,000. And if you’ve reached age 50, you can save more by taking advantage of “catch-up” contributions.
The catch-up limits haven’t changed and remain $6,000. In other words, if you’re age 50 or older you can save up to $25,000 per year in most types of employer-sponsored retirement plans.
2. Your employer can contribute more retirement matching funds.
If your employer offers a retirement plan and additional matching funds, you’d be nuts not to max out that benefit! It’s free money for any worker who participates.
However, depending on the details of your retirement plan, matching funds may come with a vesting schedule. While your contributions are always fully vested, leaving the company early means you could forfeit some amount of matching funds in your retirement account.
Starting in 2019, the total amount that you and your employer can contribute to a workplace retirement account increases by $1,000 from $55,000 to $56,000 per year.
3. You can contribute more to an individual retirement account.
What if you don’t have a cushy retirement plan at work? No problem. You can open up your own traditional or Roth IRA, which stands for an individual retirement account or individual retirement arrangement.
The IRS has been slow to raise the IRA contribution limits. The most you could save has been $5,500 since 2013.
But starting next year you can contribute $6,000 to either a traditional IRA, a Roth IRA, or a combination of the two accounts. For example, you could save $2,000 in a traditional IRA and $4,000 in a Roth IRA in the same year.
IRAs also come with a catch-up contribution limit, which remains $1,000. So, if you’ve reached age 50, you can contribute a total of $7,000 to an IRA in 2019 no matter how much you earn.
See also: The Rules for Using a Spousal IRA
4. You’re eligible for more tax deductions with higher income.
Many people don’t realize that you can max out both a workplace retirement plan and an IRA in the same year. However, when you (or a spouse) contribute to both types, the tax deduction for a traditional IRA may be reduced or eliminated, depending on your income.
Here are the upper income thresholds and phaseout ranges by tax filing status when you contribute to both a workplace plan and a traditional IRA:
- For single taxpayers, the income threshold for 2019 has increased $1,000 from $73,000 to $74,000. When you earn between $64,000 and $74,000, you’re allowed a reduced tax deduction. And when you earn less than $64,000, you get the full tax deduction.
- For married taxpayers filing jointly, the income threshold for 2019 has increased $2,000 from $121,000 to $123,000. When you earn between $103,000 and $123,000, you’re allowed a reduced tax deduction. And when you earn less than $103,000, you get the full tax deduction.
- For married taxpayers filing separately, the income threshold for 2019 remains $10,000. When you earn up to $10,000, you’re allowed a reduced tax deduction, but no deduction if you earn more than $10,000.
- For married taxpayers filing jointly when the contributor doesn’t have a workplace plan, but the spouse does, there are also restrictions. The income threshold for 2019 has increased $4,000 from $199,000 to $203,000. When you earn between $193,000 and $203,000, you’re allowed a reduced tax deduction. And when you earn less than $193,000, you get the full tax deduction.
Remember that being a high-earner means you can still max out a traditional IRA, in addition to a workplace plan, but your traditional IRA contributions just may not be tax-deductible.
5. You’re eligible for a Roth IRA with higher income.
Unlike a traditional IRA that comes with an upfront tax deduction, contributions to a Roth IRA are made on an after-tax basis. But you’re allowed to withdraw original contributions and earnings from a Roth that are completely tax-free in retirement. That can add up to massive tax savings.
One beauty of a Roth IRA is that eligible participants can max it out every year, even if you or a spouse participate in a retirement plan at work.
One beauty of a Roth IRA is that eligible participants can max it out every year, even if you or a spouse participate in a retirement plan at work. There are no limitations because, as I mentioned, contributions to a Roth are not tax-deductible. Roth benefits come on the back end when you take money out of the account.
Problem is, high earners don’t qualify for a Roth IRA under any circumstances; however, the income limit does increase slightly next year. Here are the new Roth IRA income limits by tax filing status for 2019.
- For single taxpayers, the income threshold increases $2,000 from $135,000 to $137,000. When you earn between $122,000 and $137,000, you’re allowed a reduced contribution limit. And when you earn less than $122,000, you can max out a Roth IRA.
- For married taxpayers filing jointly, the income threshold increases $4,000 from $199,000 to $203,000. When you earn between $193,000 and $203,000, you’re allowed a reduced contribution limit. And when you earn less than $193,000, you can max out a Roth IRA.
- For married taxpayers filing separately, the income threshold remains $10,000. When you earn up to $10,000, you’re allowed a reduced contribution, but if you earn more than $10,000, you’re locked out of a Roth IRA.
6. You can contribute more to a retirement plan if you’re self-employed.
If you’re self-employed either full- or part-time, there’s good news for you, too. The annual contribution limits are going up next year for a variety of small business retirement accounts.
For those with a solo 401(k), also known as a one-participant 401(k) plan, the contribution limit increases $1,000 from $55,000 to $56,000 in 2019. And if you’re over age 50, you can also make $6,000 in additional catch-up contributions, for a total contribution limit of $25,000.
As the owner of your business, you can also make solo 401(k) contributions up to 25% of your compensation, for a total contribution up to $56,000 per year, or $62,000 if you’re over age 50.
A popular retirement plan for those who are self-employed, either with or without employees, is a SEP-IRA. The contribution limit can’t exceed the lesser of 25% of compensation or $56,000 for 2019. But catch-up contributions are not allowed with a SEP plan.
This isn’t a complete list of tax changes for retirement plans, but this includes the most popular types of accounts. Be sure to visit IRS.gov for more details or consult with a qualified accountant if you have questions about your financial situation.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.
