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The IRS has Announced Higher 401(k) and IRA Contribution Limits for 2019

January 16th, 2019

The IRS announced new inflation-adjusted limits for retirement savings plans for 2019. How will it affect you?

After six years of a $5,500 contribution limit, savers can now contribute up to $6,000 per year to their IRA accounts. For 401(k)s, the new limit is $19,000, up from $18,500. If you’re 50 years or older, the catch-up contribution limits remain the same – an additional $1,000 for IRAs and $6,000 for 401(k)s.

The changes were made to help maintain purchasing power and at the direction of Congress. The irony here is that neither the IRS nor Congress is a financial planner or advisor; they don’t know your financial situation or your retirement needs, and they are only mildly interested in your financial life.

The job of the IRS is to collect taxes and its employees do their best to collect all they can from taxpayers. Their job is made harder by these contribution limits as there will be less money to tax. Members of Congress, on the other hand, are after re-election. They will do anything to win and their interest in your financial well-being is short-sighted at best.

These changes offer little guidance on what each individual saver should do. Should you save based on the new contribution limits? Should you save more? What strategy is best for you?

While there are no simple answers to these questions, experts advise that if your employer offers to match your contribution, you should ensure that you’re contributing enough to get the full match. That will go a long way in helping you meet your savings goal.

Your retirement accounts, both taxable and tax-advantaged, will  play a key role in building your retirement nest egg, so you need to think carefully about how you use each type. Other factors to consider include your income, when you want to retire, how much you have in savings, and whether you own a home.

If your goal is to retire early, you will have to save a bigger chunk of your paycheck to cover more years in retirement. If Social Security will only replace a small portion of your income in retirement, you will need to save more in order to retire comfortably.

If you have little in savings, you will need to increase the amount you contribute to make up for the lost time. If you don’t own a home, you have to factor in what the cost of rent will be in retirement.

So how much should you be saving? The correct answer is certainly not the contribution limits, but maximizing your IRA and 401(k) contributions will go a long way towards ensuring that you reach your savings target.