The Internal Revenue Service (IRS) sets limits on the amount that can be set aside in a retirement plan annually, and for 2019, they are increasing those limits. Take notice and take advantage.
A brief refresher on workplace retirement accounts
The 401(k), which is named for a section of the U.S. Tax Code, was created in 1978 to allow workers to set aside a portion of their earnings, tax-free, in order to save for retirement. It wasn’t until 1981 that the IRS allowed businesses to use payroll deductions as a way to fund these retirement accounts.
There are two types of workplace retirement accounts, the 401(k), which allows employees to set aside money tax-free, let it grow tax-free, and pay taxes on it when they retire and are presumably in a lower tax bracket. And, the Roth 401(k) in which you contribute money after taxes, the money grows tax-free, but is not taxed when it is withdrawn.
Whichever you choose, you should choose one in order to take advantage of the tax benefits of saving for retirement. That goes double for plans in which your employer matches your contribution. You should always contribute at least enough to get these matching funds, which are, in effect, free money.
Saving for retirement without a 401(k) plan
The traditional 401(k) is a workplace retirement plan. If you don’t work for a company, or if your company doesn’t offer a retirement plan, you can still save tax-free in an Individual Retirement Account (IRA), codified in 1974, four years before the 401(k). An obvious difference between the two is that you don’t have an employer who is matching contributions, but, on the upside, you don’t have an employer, so you are working for yourself. Another difference is when you open an IRA, you are pretty much in total control of how the money is invested while in a 401 (k) plan, your employer generally offers options. Finally, there are different limits on the amount you can contribute with the two types of plans.
Contribution limits are increasing
Besides creating these retirement accounts, the IRS also set limits on the maximum amount that a worker could contribute annually. In 1978, the maximum contribution was $45,475! In 1982, it was reduced to $30,000 and in 1986 it was reduced to $7,000. It then began increasing until it reached $18,500 for 2018. Starting in 2001, the IRS allowed older workers (those 50 and above) to contribute an additional amount called the “catch-up” contribution. Now, the IRS is once again increasing the limit on contributions for 2019, up $500, to $19,000 for workplace accounts and $6,000 for IRA accounts. If there is any way that you can afford to, you should take advantage and increase your contribution as well.
Retirement is an expensive gift you give to your future self. It’s going to be more expensive than your education, your car and your house all put together. While you can borrow for any of the above, you cannot borrow for your retirement. You have to save for it, and the best advice is to start saving early, save as much as you can, take advantage of employer contributions and raise your own contribution whenever you can. Oh yeah, and by the way, it is not too late to open or to contribute to a retirement plan for 2018.
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