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The 2019 retirement plan limits have adjusted for inflation and now allow you to take advantage of increased contribution limits.  For those pursuing financial independence, contributing to your retirement plans in 2019 should be a top priority.  Developments like this make inflation more palatable.

In most times, inflation tends to work against us by eroding asset values and the money used to store value over time.  Inflation also has a strong relationship with poor market outcomes.  Sometimes, however, inflation can benefit us.

One such instance comes in the eyes of debtors.  They love inflation because it makes their fixed debt repayments less cumbersome in inflation-adjusted (real) dollars.  Another benefit comes in the form of higher inflation-indexed retirement plan contributions limits.

Currently, the maximum allowed annual contribution to an IRA is $5,500 and $18,500 for a 401(k), 403(b) or 457 (collectively called defined contribution plans).  Additionally, there are catch-up contributions allowed to individuals aged 50 and over of $1,000 and $6,000 incremental to these limits, respectively.

Including these supplemental contributions, the maximum allowed for an IRA is $6,500 and $24,500 for a defined contribution plan.  But starting in 2019, the base amounts available to all ages increase.

Related: How Do Interest Rates Affect Inflation?

A Long Time Coming

IRA contribution limits will finally change in 2019, the first time since 2013 the amounts have increased.  An extended period of low (even negative) inflation is to blame for this steady state limit.

However, with inflation alive and well as of late, the IRS decided to allow both IRAs and defined contribution plans each to have an additional $500 per year contribution allowance.

Defined contribution plan amounts had a more recent increase, also $500, from 2017 to 2018.  The trend will continue for this account into 2019.

The catch-up amounts available to individuals aged 50 and over are not subject to a cost-of-living adjustment and remain the same in 2019.

Do the 2019 Retirement Plan Limit Increases Matter?

IRAs and defined contribution plans represent the main sources of tax-advantaged retirement plans available to Americans and therefore limit increases can help to reach a secure retirement. But unfortunately, these accounts have restrictions on who can contribute.

Defined contribution plans require not only an employer, but one equipped to offer this account to its employees.  Because not all employers offer this benefit, many people cannot benefit from the tax-advantaged 2019  retirement plan benefit the IRS allows.

In fact, the Bureau of Labor Statistics shows 60% of all workers have access to a defined contribution plan.

My wife’s residency doesn’t offer her a plan and she can only use her IRA to contribute toward retirement.  I, on the other hand, have defined contribution and defined benefit (pension) plans available to me through my work.

Because 40% of people lack access, it is important to hear IRA contribution limits have increased by $500.  While not anything major to get excited about, it is still a step in the right direction.

IRA Eligibility Requirements

IRAs come in two types: Roth IRAs and Traditional IRAs.  Roth IRAs invest after-tax dollars now to avoid taxation on gains later (at retirement) and have income-eligibility requirements.

Traditional IRAs invest before-tax dollars now and defer taxes until withdrawal (at retirement) and can be used by anyone with sufficient earned income during the tax year.

Both types of IRAs have annual contribution requirements requiring you to earn income to be eligible to make contributions.  As stated above, the 2019 maximum will increase and this means your maximum contribution will be the lesser of $6,000 OR your earned income.

Said differently, if you earn $2,500 in 2019, your maximum contribution will be $2,500.  If you earned more than $6,000 in income you can contribute up to the maximum.

IRA Income Thresholds and Phase-Outs

Some other income eligibility requirements are changing with this increase which affect the income tax deductibility of your contributions.

For single filers covered by a defined contribution plan, the phase-out range for contributing to a Traditional IRA is $64,000 to $74,000 of adjusted gross income (AGI), up from $63,000 to $73,000.

If you are a married couple filing jointly, where the spouse making the IRA contribution is covered by a defined contribution plan, the phase-out range is $103,000 to $123,000 of AGI, up from $101,000 to $121,000.

If the IRA contributor not covered by a defined contribution plan is married to someone who is covered, the deduction phases out if the couple’s joint income falls between $193,000 and $203,000 of AGI, up from $189,000 and $199,000.

For a married individual filing a separate return and who is covered by a defined contribution plan, the phase-out range is not subject to an annual cost-of-living adjustment in 2019 and remains $0 to $10,000.

The income phase-out range for taxpayers making contributions to a Roth IRA also change next year.  The range now stands between $122,000 to $137,000 of AGI for single and heads of household filers, which is up from $120,000 to $135,000.

For married couples filing jointly, the income phase-out range is $193,000 to $203,000 of AGI, up from $189,000 to $199,000.

The phase-out range for a married individual filing a separate return who makes Roth IRA contributions is not subject to an annual cost-of-living adjustment in 2019.  This range remains $0 to $10,000.

The income limit for the Saver’s Credit (also referred to as the Retirement Savings Contributions Credit) for low- and moderate-income taxpayers is slated to increase next year as well.  The new amounts will be as follows depending on taxpayer classification:

  • $64,000 for married couples filing jointly, up from $63,000;
  • $48,000 for heads of household, up from $47,250; and
  • $32,000 for single filers and married individuals filing separately, up from $31,500.

2019 Retirement Plan Limits, Including the IRA, Need to Be Higher

These 2019 retirement plan limits amount to little by way of finding a path to a secure retirement for people living in high cost-of-living areas.  The problem is particularly acute in areas where people face these higher cost-of-living expenses in large part from housing costs as opposed to living expenses.

For people who own their homes in high cost-of-living areas, the $500 annual retirement plan increases might be equally important as their low cost-of-living counterparts.  This is because their housing costs are largely stable and therefore their cost-of-living is as well.  The incremental retirement plan contribution would go further toward reaching financial independence.

However, for those who don’t own their own home and face rising housing costs, their tax-advantaged retirement plan contributions represent a smaller percentage of their overall net worth and incomes.

As a result, these retirement plan contribution limit increases don’t help these individuals in a meaningful way.  $500 in Wichita, Kansas goes a lot further than it does in San Francisco or New York.

Further, because of these cost-of-living disparities, the income phase-out limits listed above exclude huge amounts of the population.

I know it sounds petty, but a $200,000 annual income in New Orleans (middle America) puts you near the top 5%.  In San Francisco? You need to crack $500,000 before you reach the same percentile.

Seeing income limits double would be a great start to include all Americans in these changes.  The yawning gap between the coasts and middle America makes these de minimus changes little more than noise to large swaths of the population.

And just because the coasts have higher incomes to match the higher cost of living, doesn’t mean they shouldn’t have the same chance to plan and contribute to a tax-advantaged retirement account.

Despite this, if you in a high cost-of-living area, I still strongly recommend contributing the maximum possible to your retirement plans.

It might be peanuts to you, but it’s something.  Take any advantage you can get.

What We’re Doing with Our 2019 Retirement Plan Limits

Next year, because my wife will finish residency and her job will increase our combined income, we may only have Traditional IRAs and my 401(k) retirement plans to contribute toward our retirement savings.

We fully intend to max out any available retirement plan available to us because it is a great way to grow retirement assets in a tax-advantaged manner.  This helps us to move closer to a comfortable retirement balance.

We’re also setting aside as much money as we can in conservative investments (Betterment accounts which put 90% of our funds into short-dated bond ETFs and 10% into stock ETFs) to allow us to make a down payment on a house in the coming two to three years.

These 2019 retirement plan limit increases are something we don’t plan to miss out on.  Regardless of what next year’s income will be for us, we know anyone with sufficient earned income may contribute to a Traditional IRA.

The question is whether you exceed the income limits to have your contributions qualify as tax deductible.  Even if the contributions you make don’t make the grade as being tax deductible, your contributions can still grow tax-deferred like a Roth IRA.

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About the Author and Blog

In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time.  My job routinely required extended work hours, complex assignments, and tight deadlines.  Seeking to maintain my momentum, I wanted to chase something ambitious.

I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity.  I launched the site with encouragement from my wife as a means to lay out our financial independence journey to reach a Millennial retirement and connect with and help others who share the same goal.

Some of my favorite things to discuss include investing in index funds, how to save money, travel hacking with help from the Reddit churning community, house hacking and optimizing the benefits of my condo vs. apartment living, and tax topics like the earned income tax credit, common tax deductions,  tax reform in 2018, or other useful tax topics.  I want this to be a journey for us all to learn how to make a lot of money and pursue the lives we want.

Please continue to watch the site for more to come and post below with your questions or comments.

Disclaimer

I have not been compensated by any of the companies listed in this post at the time of this writing.  Any recommendations made by me are my own.  Should you choose to act on them, please see my the disclaimer on my About Young and the Invested page.

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Join the discussion 6 Comments

  • Susie Q says:

    Great article, Riley! It might be interesting to see how much of the differences in the cost of living come from housing and how much from living expenses. I live in a “low cost” state and don’t see much difference other than that I could buy a nicer home for the same amount of money. For those readers who own a home, the increases may be closer to equally as important in the high and low cost states.

    • Those are excellent points and I will incorporate those into the post. That distinction is important to make because an already-paid-for home (or stable housing costs experienced under a mortgage) make the retirement plan limit increase noteworthy. I know I plan to take advantage of the increase. Thanks for commenting!

  • Xrayvsn says:

    I do wish the IRS gave a bigger bump in contribution limits across the board as I have maxed out all my accounts across the board every year and always looking for more space to park money in. $500 in the grand scheme of things is a small step in the right direction (of course they have to balance this because they need money now and can’t have everyone doing tax free deferrals otherwise there would be no money to run the government).

    • Agreed. I wish the limits were double what they were. I’d try my hardest to take advantage of them and sick away as much as I could.

      Oddly, by locking the funds in for 30+ years, I’d feel more secure spending other funds we have now. I guess taking money away from myself makes me feel more in control of my money? Odd how that works. Less room for mistakes.

  • Huh. For whatever reason I’d never considered different contribution limits for different areas of the country based on area median income, but you make a compelling case.

    • Young and the Invested says:

      Applying national averages to HCOL areas really does slight those areas of the country from taking advantages of tax-advantaged retirement plans. It’s doubtful anything will change, however.

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