2019 is just around the corner and with a new year brings new changes. These changes include changes to your 401(k), IRA, FSA, and HSA that help you save more money all courtesy of the US Government and Internal Revenue Service (IRS)!
Hopefully for you engineers out there, you are closing out your financial books for this year and making preparations for 2019. You know that I am! Right now with the information presented below, I am finalizing my budget for next year to see how I can take advantage of the changes to my tax free accounts.
401(k)
Starting in 2019, the IRS will increase the contribution limit to your 401(k) (or equivalent) to $19,000 from $18,500. While $500 may not seem like much, this was done to help you keep up with inflation.
Also let’s take a look at what a $500 increase means for you over the course of your career. Again as you know, I like to run the numbers and drive home how compound interest can help increase your nest egg.
As we typically do, let’s assume a historic rate of return of 7%. We will assume an investment time of 43 years (age 22-65 typical working career). We would see a return of an extra $141,732.60! Isn’t that crazy! Just this little extra of $500 every year can go a long way for you in retirement.
Not only do they help you save more money for the future, but the $500 increase also helps you legally avoid taxes on that $500 for the 2019 tax year! Basically now you can take a full $19,000 deduction from your taxable income.
For those of you lucky individuals out there who have an employer match of any type up to the maximum amount, I would totally take advantage of this increase. Why you might ask? Because like I noted here, it’s free money and an automatic return on investment!
IRA/Roth IRA
Like your 401(k) plan, the IRS is also increasing the contribution limits on your IRA/Roth IRA accounts. The increase is $500 from $5,500 to $6,000. As seen above, you can see how this extra $500 helps you in the long run, especially if you are at the beginning of your career.
From those over the age of 50, the limit is now set at $7,000. This is up from $500 from 2018’s maximum of $6,500.
Furthermore, you can also use your full IRA (not Roth IRA) contribution and deduct that from your taxable income should your modified adjusted gross income is less than $64,000 for single filers or for those who are filing jointly the limit is $103,000.
Now should you be able to contribute the maximum between your 401(k) and IRA/Roth IRA, you basically will have doubled the amount you will have down the line to $283,465.21 (assuming the same inputs from above).
FSA
With regards to your FSA, the increase in your contribution limit is a modest $50. You are now allowed to contribute a maximum of $2,700 up from $2,650. While there are no compound interest benefits, you do have the benefit of having an extra $50 that is now tax free that can be used towards your health related spending!
For those who are seeing a therapist like I am or who have recurring healthcare costs, I would highly take advantage of even this small increase!
HSA
Those with access to a Health Care Savings Account, the increases are as follows:
$3,450 to $3,500 for a single individual
$6,900 to $7,000 for a family
Unlike an FSA, which typically is a use it or lose it type of account, most HSA’s will allow you to roll over the money from one year to the next. Also depending on the benefit provider, you may have access to some investment funds and can deploy unused money that way so that your money makes money for you!
Wrapping it all up
To make it nice and easy for you all. I have made a chart below summarizing all the changes above.
Hopefully all of my readers can use this information as you map out your financial situation for next year. I understand that everyone is not in the same boat as me and will not even be able to contribute the maximum even for this year. That said though, it is my hope that through this article and my previous articles (link), I have demonstrated to you all how every bit of saving can go a long way.
All I want to do is simply save you more money and take advantage of any tricks out there so that your life down the line is more comfortable.
Resources and Sources:
IRS 401(k) 2019 Limits
IRS IRA 2019 Limits
IRS Roth IRA 2019 Limits
https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2019
Compound Interest Calculator
http://moneychimp.com/calculator/compound_interest_calculator.htm