New IRS Retirement Contribution Limits
This month, the Internal Revenue Service raised the cap on the limits that individuals will be able to contribute to their retirement accounts for the 2019 tax year. The limit for participant elective deferrals to 401(k)s and 403(b)s—arguably the most common type of employer-sponsored retirement plans—has been raised to $19,000, up $500 from the 2018 limit of $18,500. The limit for contributions to Individual Retirement Accounts (IRA) has also been raised to $6,000, up $500 from the 2018 limit of $5,500. This is great news for those individuals who have the means to contribute and max out their retirement plans to bolster their financial situation for their future years, however, very few people take full advantage of their participation in such plans. According to a Center for Retirement Research at Boston College analysis, about 10% of Vanguard participants maxed out their 401(k) contributions in 2016 (when the limit was $18,000), a drop from 12% in 2013 when the limit was $17,500.
While the news of the retirement plan deferral limits being raised is positive for those who wish to increase their retirement savings and contributions, this benefit does not help every American. Offering a retirement plan such as a 401(k) is not a requirement for employers, and many workers do not have access to benefits like these. Unfortunately, even when a worker does have access to a retirement plan, they may not save money because they are unaware of the advantages of doing so. Based on a 2015 study conducted by the Investment Company Institute, only about 54 million American workers contribute to a 401(k) plan while about 150 million Americans were employed that year. Even if workers do put money into their 401(k), many participants don’t contribute enough to take full advantage of their employer match if one is offered, missing the opportunity to further grow their retirement funds.
Even when the opportunity arises, saving for retirement is not always priority number one for most individuals. The Economic Policy Institute calculates that nearly half of U.S. families have no retirement savings. And among those who have saved for retirement, just 38% of investors have a written financial plan, according to a Gallup survey. As a CERTIFIED FINANCIAL PLANNER™ professional, I believe the key to a healthy financial future is to clearly define your financial goals and develop a process and plan to accomplish them. Educating yourself on all of your options and having a firm understanding of the steps you can take, no matter how small, will help you to plan and achieve your goals. To emphasize the importance of planning, we look to what Benjamin Franklin said: “If you fail to plan, you are planning to fail.” If you have any questions about planning for your financial future, send me an email at [email protected].