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The only two things that scare me are God and the IRS. —--Dr. Dre
What am I afraid of? The IRS. That’s it. I don’t want those people knockin’ on my door, man. —–Tracy Morgan
I hardly ever hear good things about the IRS. Those quotes above were just the “PG” version I could find. But is the hate justified? Today is not the day to argue that. We are here to talk about the new changes to 401k and individual retirement accounts in 2019.
I have always wished for more ways to increase my pretax investment. My wish came true in a small way. The IRS has just given us a Christmas gift. While these changes might not look like much to some people, remember it is all about compound interest and the long term effect is what matters the most.
Many of you know the compound interest calculator is my favorite. Imputing 500 dollars a year into the compound interest calculator spits out $62,400 if invested every year for 30 years with an average annual interest rate of 8%. I mean, I’ll take it.
Since, I was going to review the changes anyway, I figured, why not post something to that effect.
For full information click the IRS link below.
401(k) contribution limit increases to $19,000 for 2019; IRA limit increases to $6,000
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Here are prior posts you can read to get you up to speed about IRA and 401k
All you need to know about 401k
Time value of money and impact of compound interest
Roth IRA millionaire
12 toddler steps to financial freedom – Dave Ramsey rebuttal.
Ok now let us dig into the changes.
The contribution limit for employees who participate in 401(k), 403(b), and most 457 plans is increased from $18,500 to $19,000. There is something to be said for a nice round number. Wondered why it was not $18,950. Anyway, moving on.
What about catch up distribution?
Remain the same = $6,000 dollars.
If you love Roth IRA like me, you are in luck. The contributions to an IRA, has also been increased from $5,500 to $6,000. Let me remind you though, that this was last increased in 2013. It’s been a while. Unfortunately the catch up contribution remained at 1,000. Sorry older folks. This is another reason to start investing early and not having to try to catch up on contributing to your retirement account. I trust you, my readers; you will be rich by 50 years old. Who needs the catch up? Right.
The income ranges for determining eligibility to make deductible contributions to traditional IRAs and Roth IRA has also increased
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- For single taxpayers covered by a workplace retirement plan
2019 phase-out range = $64,000 to $74,000
2018 phase-out range = $63,000 to $73,000
- For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan
2019 phase-out range is $103,000 to $123,000
2018 phase-out range $101,000 to $121,000
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered,
2019 phase-out range = $193,000 and $203,000
2018 phase–out range = $189,000 and $199,000.
- For a married individual filing a separate return who is covered by a workplace retirement plan
Out of luck on this one.
Phase-out range remains $0 to $10,000.
- If you are regarded as singles and heads of household,
Phase-out range = $122,000 to $137,000
Phase-out range = $120,000 to $135,000.
- For married couples filing jointly,
2019 income phase-out range = $193,000 to $203,000,
2018 income phase-out range = $189,000 to $199,000.
- Married individual filing a separate return
Again, out of luck! It seems like the IRS want married people to file taxes together.
Phase out remain the same = $0 to $10,000.
There are other changes in the IRS article like defined compensation plans and other “rich people” plans in the changes but they do not apply to most people.
Good for the savers
The plan is available to everyone with a job that offers them but I will not sugarcoat it, it benefits the savers. If you are a prodigious accumulator of wealth and you can hustle to save $19,000 by yourself and if you are married and your spouse works, that’s another $19,000 saved. Total of $38,000 just in 401k or 403b. Add in a 457 plan , that’s 76,000 dollars invested just between the two of you. You might say, but who can afford to save that much? Well, if you can’t afford to do all of the above, still get the full match from your job first. Then work your way up!
Many of my audience are doctors and other high income professionals; there should be no excuse not to contribute the maximum amount.
IRS is finally keeping up with inflation.
The price of everything keeps going up, it only makes sense that the retirement accounts for the future also keeps up with the inflation.
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What do you think about these changes? Early Christmas gift or what?
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Thanks for reading.
Adebayo
Website
I am a pulmonary and critical care doctor by day and personal finance blogger/debt slaying ninja by night.
After paying off close to $300,000 in student loan debt in less than 6 months into my real job, I started on a mission to help others achieve the same. There is no magic to this than to strap up and get it done. Some of the ways we achieved this include side hustle, budgeting, great negotiation skills, and geographical arbitrage.
When I was growing up, common knowledge in Nigeria is that there is one thing you cannot trust anyone else with, and you guessed it – your money.
Being frugal came easily to me based on my background. However, the concept of building wealth did not solidify in my mind until when I finished medical school. I wish I knew what I know now when I was 14. Still, I don’t know enough and I am constantly learning to improve my knowledge.
My goal is to reduce financial illiteracy among young professionals. I am catering to the beginners – babies and toddlers in financial literacy.
