Our planet seems to be run by economics. Every day, we're faced with financial requirements and limitations. That being said, when one of those limitations (like how much you can save in your retirement account) is increased, it's really great news!
Each year, the Internal Revenue Service (IRS) reviews the maximum contribution limits for retirement accounts for the following tax year. Sometimes they make changes, sometimes they don't. These are accounts, such as the 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan (a 401(k) style plan for military members).
On November 1, 2018, the IRS announced changes to employee contribution limits for 401(k) and other retirement accounts for the 2019 tax year. As we close out these last couple of months in 2018, let's keep these contribution limits in mind for how much we want to save for retirement in 2019.
Here are some of the changes to 401(k) contribution limits for 2019.
Basic limits for 2019
The IRS imposes limitations as to how much employees can contribute to their 401(k) plan each year. That contribution limit was increased from $18,500 to $19,000 for the 2019 tax year.
This includes all elective employee salary deferrals as well as any after-tax contributions made with a 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan.
The IRS encourages people nearing retirement to save more by offering an allowance called "catch-up" contributions. What this means is that if you're 50 years of age or older, you're allowed to make an additional $6,000 catch-up contribution to your 401(k) each year.
While the catch-up contribution limit hasn't changed for 2019, this still affords the opportunity to catch up if you had to dedicate resources to paying for your children's college education in the past.
This pushes the maximum contribution limits to $25,000 for those ages 50 and older.
Total contribution limits for 2019
Without imposed limitations, people could take advantage of retirement accounts. High-income earners could hide all of their income by deferring it to a 401(k) plan.
In doing so, their student loan payments could go from $2,500/month to literally nothing. They technically don't have enough discretionary income, because it's all going to their retirement account. Over time, their student loan would get discharged and college would be free (minus any taxes due).
To avoid this, the IRS sets a maximum allowable contribution. That's your elected deferral plus any after-tax contributions you may make, plus your employer’s match.
That maximum allowable contribution to a 401(k) increased in 2019 from $55,000 to $56,000.
Take the first step
A retirement plan is an excellent way for small business owners to save for retirement, retain good employees and offset some tax liabilities. However, there are many different types of employer-sponsored retirement plans.
If you need help figuring out which is best for your business, check out this article.