401k plans make up the bulk of many retirement savings strategies across the country. Each year, there are potential changes to the maximum contributions you can make to your retirement savings. 2019 is no exception. Prepare to explore the differences you can expect in contribution limits for 2019 when compared to 2018 maximum contributions.
Brief 401k Overview
A 401k plan is an employer-sponsored retirement plan that allows workers to invest a portion of their pre-tax earnings toward their retirement savings. When employees do this, that money goes untaxed until it gets withdrawn from the account.
Initially, these plans were intended to supplement employer pension plans. Today, though, few employers offer pension plans. While some employers do offer matching contributions, up to a percentage of their employees’ salaries, this is something not every employer does.
The IRS does have strict limits for the amount of money an employee can contribute to their 401k plan. That leaves some employees looking for other retirement savings or investment options. Despite these contribution limits, the 401k remains the primary source of retirement income and investing for many workers today.
2019 Contribution and Income Limits
When it comes to 401k contribution limits, there are a few different limits to consider. First, there is the pre-tax contribution limit. For 2019, that maximum amount of pre-tax dollars most employees can contribute to a 401k plan is $19,000.
That is a $500 increase over the 2018 maximum contribution of $18,500 and represents only the second time since 2013 that these limits increased for two consecutive years – a favorable sign for the economy and investors.
Current 401k rules allow employees aged 50 or older when the calendar year (2019) ends to begin making what it calls “catch up” contributions.
The pre-tax contribution limits for catch up contributions remains the same this year at $6,000. What it means, though, is that if you are over the age of 50, you can contribute up to $25,000 instead of being limited to the standard $19,000 maximum contribution. The increases for this particular limit are not based on the rate of inflation and do not necessarily increase when the usual contribution limits do.
Some 401k plans allow employees the option of making after-tax contributions to their 401k plans in addition to their pre-tax contributions. For the 2019 calendar year, the maximum after-tax contributions employees can make to their retirement plans are $56,000 or 100 percent of their total compensation (whichever is the lower total amount).
Contribution limits do not include contributions made by an employer, often rendered as a percentage 'match' to what the employee contributed. So that is 'free' money going into your retirement account that does not count toward your contribution limit. If you remain with your employer, those numbers can add up quickly.
Types of 401k Plans
While most people think of a 401k plan as one type of retirement plan, the truth is that there are multiple options when it comes to types of 401k plans. Since it is an employer-sponsored retirement plan, you may have access to only one or a couple of the following types of 401k plans:
- Traditional 401k
- Safe harbor 401k
- Simple 401k
- Solo 401k
- Roth 401k
Employers who offer Simple 401k plans, though, may not be able to provide additional types of 401k plans.
The better you understand your organization’s 401k plans and your contribution limits, the better you can prepare for your retirement. You also have the option of making other types of retirement investments, including IRAs – which you can make with pre or post-tax dollars depending on the kind of IRA you purchase. The key is to invest in ways that limit your exposure to fines and penalties, save wisely, and invest well in your 401k plans and more.
Individuals can review the November 1, 2018 announcement issued by the IRS for additional information.