Cost of living increase will kick in during the 2019 tax year which means individuals can save more money in tax-advantaged plans prior to their retirement.
Here are some key numbers:
- Annual salary deferral limits in plans such as 401(k), 403(b), 457 and Federal Government Thrift Savings plan have increased to $19,000 from $18,500. This does not include contributions from employers such as matching contributions or profit-sharing contributions.
- The catch-up contribution amounts available for employees aged 50 and older remains unchanged at $6,000.
- The IRS section 415 limit has increased from $55,000 to $56,000. This is the total amount that can be put away in a qualified retirement plan for the benefit of an employee (sum of employee contributions and employer contributions)
- IRA and ROTH IRA annual contribution limits have increased to $6,000 up from $5,500.
Catch-up contribution strategy
Many employees that are 50 and older have most of their assets in pre-tax assets within their 401(k) plans which means that when they make withdrawals in retirement, they will be taxable. In order to build up the "tax-free" bucket of money they should consider designating their catch-up contributions as ROTH if their plans allow it (majority of plans now offer this). This way they can keep the same annual tax deduction from pre-tax deferrals.
What difference does the extra contributions make?
If you add an additional $6,000/year from age 50 to 65 earning on average 7% per year you will have an extra $150,774 in their retirement coffers. It's never too late!
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