Our good pal, the IRS has issued guidance on contribution limits for 2019.
The news is good for those already maxing out their tax-advantaged space or planning to do so next year.
According to the IRS news release, 401k, 403b and most 457 plans are changing from an $18,500 max to $19,000 next year.
That’s the second bump in a row after the IRS raised it $500 last year.
The 2.7% bump in contribution limits is right in line with inflation.
On the IRA front, the $5500 limit rises to $6000.
It’s the first bump since 2013 which explains why the bump is larger at 9%. The IRS is just catching investors up with a few years worth of inflation in that move.
Those over 50 can continue to contribute an additional $1000 in catch up contributions. The overall contributions if using both a 401k and an IRA are going from $24,000 to $25,000.
It’s a very nice bump for anyone already making full use of their tax-advantaged space. That’s an extra $1000 that can be sheltered from tax and grow tax-free as well.
That may not seem like much but it does add up when you compare growth against a taxable account.
For example, $1000 invested every year across 30 years will grow to be ~$94,000 in a tax-deferred account. That same investment would be ~$65,000 in a taxable account. That’s a nice difference that investors can benefit from. Not only are investors who take advantage of these accounts getting the benefit of tax-free growth but they also save on taxes now in the case of a 401k and a Traditional IRA.
$1000 means an extra $150 in tax savings(assuming a 15% tax rate) that can also be invested in a taxable account.
In the case of a Roth IRA, there’s no immediate tax savings but tax-free growth and tax-free distributions as well.
A savvy investor can potentially get the tax free benefit now in a 401k or traditional IRA and pay no taxes later when withdrawing if their income is low enough and taxes remain the same.
While not mentioned in the IRS release, HSA limits also went up from $3450 per individual last year to $3500 this year.
Overall, this is a great change for those of us who are maxing out these accounts already. The difference may not be earth shattering. However, as evidenced by the numbers above, tax-advantaged space is one of the best tools an investor has for long-term investing. It’s nice to see the IRS make changes to these contribution limits to help investors keep pace with inflation.
It’s also nice to have more tax-advantaged space to take advantage of in 2019.