Annually, the US government adjusts various investment and benefit thresholds based on the inflation rate. Inflation, or the rising of prices that we pay for goods and services, can directly affect the standard of living for retirees on a set income. Given inflation has been relatively low during the last 10 years, most of the annual adjustments to benefit thresholds have been small. However, below are some of the changes to come in 2019.
Tax-Deferred Savings Thresholds
The contribution limit, or maximum amount that can be contributed, to 401k, 403b, most 457 plans, and the federal government’s Thrift Savings Plan (TSP) will rise from $18,500 to $19,000 in 2019[i]. Employees age 50 and older will continue to be able to contribute an additional $6,000 as a ‘catch-up’ provision. However, the catch-up contribution limit did not increase between 2018 and 2019.
The IRS also raised the contribution limit for IRA accounts for the first time in six years! Starting in 2019, the contribution limit will increase from $5,500 to $6,000. The catch-up contribution for IRAs of $1,000 was also unchanged between 2018 and 2019.
Traditional IRA contributions are tax-free (you get a deduction on your tax return) if you aren’t eligible to contribute to an employer-sponsored retirement plan. If you are contributing to an employer-sponsored plan, the deduction for making a contribution is phased out starting at $64,000 in income as a single tax filer or $103,000 if married filing jointly. It may be beneficial to check with your CPA whether an IRA or Roth IRA is better suited to you given your income and investment goals.
Roth IRA contributions are also now capped at $6,000, but your ability to contribute phases out completely at $137,000 of income for single tax filers or $203,000 for married filing jointly tax filers.
Social Security Adjustments
Annually, in mid-October the Social Security Administration determines what Cost of Living Adjustment (COLA) will be made to benefits in the coming year. This is immensely important for millions of Americans who depend upon social security benefits to help provide them with retirement income. Some good news to share is that social security beneficiaries will receive their biggest cost of living adjustment in seven years! In 2019, the COLA will increase benefits by 2.8% over last year. For the average social security recipient, that amounts to an increase of approximately $39 a month or $468 a year.[ii] In 2019, a retired worker reaching full retirement age would receive a maximum of $2,861 a month—an increase of $73 a month, or $876 a year.[iii]
The age that the Social Security Administration defines as “full retirement age” will also increase by two months, to 66 years and six months for people who will turn 62 in 2019. The full retirement age will increase in 2-month increments over the next two years until it reaches age 67 for everyone born in 1960 or later.[iv]
Given social security benefits and their annual inflation factors are modest, it is important for those still in their working years to take advantage of the higher savings thresholds available. It can be difficult to save given the high cost of living and rising cost of goods and services. My father, Alan Kondo, CFP® often quoted the saying, “pay yourself first.” In other words, route a set amount of each paycheck directly to your retirement savings account before you receive your paycheck. In such a way, you are paying yourself before you start paying your monthly living expenses and discretionary purchases.
The decisions you make each year with your personal finances will have a lasting impact. Be sure to reach out to your CPA and Financial Planner for help implementing your savings plans or as a financial sounding board.
[i] https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19000-for-2019-ira-limit-increases-to-6000
[ii] https://www.aarp.org/retirement/social-security/info-2018/new-cola-benefit-2019.html
[iii] https://money.usnews.com/money/retirement/articles/social-security-changes-coming-next-year
[iv] https://money.usnews.com/money/retirement/articles/social-security-changes-coming-next-year