15 Nov Save More Money! – Retirement Plan and Health Savings Account Contributions Increasing for 2019
The IRS recently announced that there will be an increase in the amount you can save in tax advantaged retirement accounts in 2019. Contribution limits are adjusted periodically to keep pace with inflation. For you, this means in 2019 you can save more and potentially pay less in taxes. Different types of retirement plans allow you to contribute in different amounts, so the increases are of varying amounts well.
Traditional and Roth IRA
Both flavors of IRAs are getting a bump in the allowed annual contribution for the first time since 2013. In 2019 eligible tax payers can now contribute $6,000 to Traditional and Roth IRAs. This is up from $5,500. The catch-up contribution amount of $1,000 for those that are 50 or older in 2019 is not increasing. If you are eligible to contribute to both Traditional and Roth IRAs, you can contribute $6,000 to each or $7,000 to each if you are age 50 or older.
Keep in mind that both traditional and Roth IRAs are subject eligibility phaseouts based on your Adjusted Gross Income (AGI). Thankfully, the phase out amounts for IRAs are also increasing. Those who are covered by an employer retirement plan are subject to AGI phaseouts for Traditional IRA contributions.
2019 IRA AGI Phase-outs for Active Participants in Employer Retirement Plan:
Single: $64,000-$74,000 (up from $63,000-$73,000 in 2018)
Married Filing Jointly:
- Both spouses are active participants: $103,000-$123,000 (up from $101,000-$121,000 in 2018)
- One spouse is an active participant: $193,000-$203,000 (up from $189,000-$199,000 in 2018)
With Traditional IRAs, if you are not covered by a retirement plan through your employer you can contribute the full amount annually regardless of your AGI. With a Roth IRA, as long as you under the AGI limits you can contribute. Roth IRA eligibility is not affected by participation in an employer’s retirement plan, but keep in mind you must have earned income (wages or salary) to contribute to an IRA.
2019 Roth IRA Phase-outs:
Single: $122,000-$137,000 (up from $120,000-$135,000 in 2018)
Married Filing Jointly: $193,000-$203,000 (up from $$189,000-$199,000 in 2018)
Need a quick refresher on the difference between a Traditional and a Roth? Traditional IRA contributions are made on a pretax basis, meaning you are eligible to deduct the contribution from your income when you file your taxes, lowering your tax bill for the year. However, you will pay income taxes on that money when you make withdrawals. A Roth IRA works the opposite way– post tax dollars go in and it grows tax free with no additional tax paid when you pull money out. There are penalties for both if you violate any of the rules such as removing money too early.
SIMPLE IRAs are very popular with smaller businesses because they are, as their name suggests, simple to set up and administer. They also allow for employer and employee contributions. If you have a SIMPLE IRA or 401(k) in 2019 you will be able to contribute $13,000. This is an increase over the $12,500 that was allowed in 2018. Catch-up contributions (50 or older) of $3,000 remain unchanged from 2018.
Employee Salary Deferrals
In 2019 if you have a 401(k) plan through your employer you can defer up to $19,000 of your compensation to that plan. This is up from $18,500 that was allowed in 2018. These amounts also apply to 403(b) and most 457 plans as well. Some individual plans may not allow you to defer the full amount so check with your plan administrator to be sure.
The catch-up contribution amount has not changed since 2015 when it increased by $500 to $6,000 and it will remain the same for 2019. Catch up contributions for those 50 or older in 2019. Keep in mind that if you turn 50 during 2019 you are eligible for the additional catch-up contribution even if your 50th birthday is December 31st, 2019. As with a Traditional IRA these funds can be deferred pre-tax and will help you save on income taxes in 2019.
Total Annual Contributions
Section 415 of the Internal Revenue Code tells us the total amount that can be contributed to an employee’s 401(k). This number includes deferrals, and employer contributions. The total amount that can be contributed to an employee’s 401(k) in 2019 is increasing to $56,000 up from $55,000 in 2018. This is especially important for self-employed and small business owners because these increases to section 415 annual limits also apply to Solo 401(k) and SEPs. For more information on Retirement Plans for Small Businesses check out a previous blog we wrote on this topic: Small Business Retirement Plans
Health Savings Account (HSA)
Although not a retirement account in the traditional sense an HSA is a powerful tax advantaged savings tool that you can benefit from now and in retirement. The amount that you can contribute to your HSA in 2019 is increasing to $3500 for those with single coverage High Deductible Health Plans (HDHP) and $7,000 for those with family coverage. This is an increase of $50 for single coverage and $100 for family coverage over 2018. These annual contribution amounts include amounts that are contributed by your employer as well as your personal contributions through salary deferrals or deposits.
An HSA is similar to an IRA, but for your health expenses. From a tax perspective it is even better because there is a triple tax advantage.
- You are able to put pre-tax dollars into your HSA. This will help reduce your income tax for the year.
- Many HSAs allow you to invest some or all of your account balance. These investments grow tax free.
- If you withdraw money for qualified health expenses you will not have to pay any tax on it when you withdraw it.
Simply put, the money that goes into your HSA and is eventually used for qualified health expenses will never be taxed. Be aware however, if you use the money for non-qualified expenses before age 65 you will be charged ordinary income tax and a 20% penalty. If you are over 65 you can use the money for non-health related expenses without penalty, just pay the income tax on the withdrawal as you would if you were withdrawing from an IRA or 401(k).
Although you can’t contribute these larger amounts yet to save on your 2018 taxes, if you haven’t yet maxed out your annual contributions for 2018 you still have time. For IRAs you can contribute until you file your taxes. The deadline this year is Tuesday April 17th 2019. This is also true for HSA contributions. Contributions made before April 17th 2019 can be deducted from your 2018 income taxes. Even though you can’t contribute as much for 2018 you do still have time to save a bit on your taxes and sock away from money for retirement, your health or both!
If you are currently deferring the maximum by payroll deductions be aware that you may have to make some adjustments in the new year to take advantage of these increases, especially for HSA and employer sponsored plans. This is also a great time to review your beneficiaries for HSAs, retirement accounts, and life insurance policies.