2019 contribution limits are up, and you can thank the IRS

Man who is determining how the increase in contribution limits to his 401k in 2019 will affect his retirement.

Thanks to a cost of living adjustment made by the Internal Revenue Service (IRS), you can put away more money in retirement plans and IRAs in 2019.1

Let's break down what that change means whether you’re already saving or just getting started.

If you already save money in a 401(k), 403(b) or IRA

Good news! The Internal Revenue Service (IRS) decided you can sock away as much as $19,000 in 2019 into a 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan. That’s $500 more than was previously allowed. (Some retirement plans have set a lower limit, so look into your plan’s details.)

Granted, $500 may not seem like a lot. But it could lower your taxable income. (Every little bit helps, right?) Plus, if you already save the max amount, it’s just $41.66 more per month to contribute the “new” max in 2019. 

Let’s do the math

Over time, it can add up. For example, let’s say you’re 45 years old. Retirement is getting closer, so you’ve decided to max out your contribution to your 401(k) and increase it $500 more starting in 2019 (and maintaining that contribution level until you’re 65.) Over the next 20 years, assuming a 6% annual return, you could have more than $18,000 more in the retirement nest egg you’ve built.2

What could you do with that $18,000+ someday? Maybe pay off your car, or take the whole family on a nice long, Caribbean cruise, or build that new deck and patio you’ve wanted for years.

Also new—if you have an IRA, your annual max contribution increases from $5,500 to $6,000 in 2019. When was the last time IRA limits increased? It was 2013, so do a happy dance, and consider bumping up your contribution in tax year 2019. Want to learn more about IRAs? Check out our IRA basics.

Don’t forget you can make catch-up contributions if you’re 50 or older, but the max on that remains the same—$25,000 to a 401(k) or 403(b) plan (which includes the catch-up contribution) or $7,000 to an IRA.

Visit the IRS web site for details

There are all sorts of rules that determine if you can deduct your traditional IRA contributions or not. It’s mostly based on income, marital status, and whether you have a retirement plan at work. You’ll want to read what the IRS says about that so you know how it applies to your own situation, because some of those limits have changed, too.

If you aren’t saving money for retirement (yet)

So the important thing is to just get started. Don’t beat yourself up for not starting sooner. Don’t worry that it’s too late. Just take the first step to set aside a small amount of money and increase it over time as you can. There’s no shame in putting your future first.

“I always tell people a good time to start is when you get a salary increase, or a bonus or lump sum. Use it to your advantage. If your salary goes up 3%, taking 1 or 2% of that and putting it toward your retirement is money you likely won’t really miss,” says Heather Winston, a client relationship assistant director with Principal® in Des Moines, Iowa.

“Of course, if your employer offers a matching contribution in its 401(k) plan, try to set aside enough to get that match. It increases your contribution rate.” Otherwise, she says, you’re missing out on free money that could flow from them … to you.

The tax year 2019 contribution limits for retirement plans and IRAs may not be a big concern for you right now because retirement may seem a long way off.  But that’s the exact reason to start saving when you’re young. The power of compounding interest can work in your favor. And when you’re ready, it’s nice to know the max is now more “max” than it used to be.

For example, putting aside just $100 a month for retirement can add up. When invested in a 401(k) plan for 20 years or more at a 7% rate of return, that $100 a month could ultimately grow to more than $52,000.*

Now imagine if you could set aside even more?

Next steps

1 Can contribute the lesser of plan or IRS indexed limits.

2 The assumed rate of return in this example is hypothetical and does not guarantee any future returns nor represent the returns of any particular investment. Amounts shown do not reflect the impact of taxes on pre-tax distributions. Individual taxpayer circumstances may vary. This is for illustrative purposes only.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Insurance products and plan administrative services provided through Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC and/or independent broker-dealers. Principal Life, and Principal Securities are members of the Principal Financial Group®, Des Moines, Iowa 50392.