Last month we learned that Social Security recipients will receive a 2.8 percent cost of living adjustment (COLA) next year. Annual COLAs are based on inflation data from the Bureau of Labor Statistics and as evidenced by 2018’s and 2019’s relatively large increases, upward price pressures for U.S. households have clearly picked up. Beyond Social Security benefits, though, the government regularly indexes many other things to inflation, such as the annual limits on the dollar amount of contributions that can be made to popular tax-advantaged savings vehicles.
With 401(k) plans, for instance, current law allows individuals to contribute up to $18,500 each year (plus another $6,000 for participants ages 50 and older). As for IRAs, the annual cap is $5,500, along with an extra $1,000 in catch-up contributions for older savers. Most of these ceilings are required by law to be adjusted annually for cost-of-living increases, and inflation was indeed high enough this year to warrant a change in some of the above-mentioned limits. For example, individuals who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan will be able to contribute a maximum of $19,000 to these savings vehicles in 2019.
Similarly, the cap on annual contributions that can be made to an IRA will rise by $500 to $6,000 in 2019. That is a welcome change considering that the limit for these plans, unlike 401(k)s, has not seen an increase since 2013. As for catch-up contributions, the ceilings for both IRAs and 401(k)s will be left unchanged in 2019. Another noteworthy adjustment is that the income ranges for determining eligibility to make deductible contributions to traditional IRAs, to contribute to Roth IRAs, and to claim the Saver’s Credit will all increase next year. More details on these and various other alterations that will occur in 2019 can be found in IRS Notice 2018-83.
For some these increases may not seem significant, but an earlier NerdWallet analysis estimated that a 30-year-old who starts investing an additional $500 each year (just $42 a month) could have an extra $70,212 by the time he or she retires. Even for those unable to start until age 40, investing $500 more every year could still add $34,712 to their retirement nest egg. Sadly, just 9 percent of 401(k) participants make annual contributions that come within 10 percent of the limit, according to a Boston College study. A growing number of plan sponsors, though, are utilizing automatic escalation and other techniques to nudge workers into more effective savings rates.
Sources: U.S. IRS, Boston College (CRR), WSJ, CNBC, NerdWallet
Post author: Charles Couch