2019 Update on Different Retirement Plan Types
The New Year has begun. Are you keeping your resolutions? One good resolution is increasing or beginning to save. Savings in any form is wise, but retirement account savings, in particular, have some extra tax advantages, and here is the great news: the IRS has increased allowable contribution limits to many retirement account options. Here are the new year 2019 limits:
- 401(k), 403(b), and most 457 – Annual employee contributions up to $19,000, and if you’re 50+, you can make additional catch-up contributions of $6,000
- IRAs – Annual contributions up to $6,000, and if you’re 50+, you can make additional catch-up contributions of $1,000
Now, here is a quick retirement account recap:
401(k) – You’re probably familiar with the 401(k), which is a workplace retirement account that allows you to contribute money, pre-tax, straight from your paycheck. So, if you earn $100,000 and contribute $15,000 toward your 401(k), you’d only be taxed that year on $85,000.
403(b) – A 403(b) is another tax-advantaged retirement savings plan, but for public education organizations and government organizations.
What you need to know about both the 401(k) and the 403(b):
- Investment gains grow tax deferred until you withdraw.
- Withdraw before 59 ½ and you’ll pay a penalty.
- Many companies offer a generous employee match contribution toward employees’ 401(k) plans.
- Some plans have a Roth option (which means employees can designate some or all of their elective deferrals as taxable in the year of contribution rather than the year you withdraw. The Roth tax advantage comes later when the withdrawals are never, ever taxed.
457 – A 457 plan is offered to certain state and local public employees and certain tax-exempt entities. It works almost exactly like the 401(k) plan and has the same contribution limits, but it offers a big benefit. If your company also has a 401(k) plan, you can contribute up to the maximum into both plans. And unlike with 401(k) and 403(b) plans, the IRS will not penalize you for making withdrawals before age 59 ½.
IRA – An Individual Retirement Account (IRA) is available to anyone, even those whose companies offer a 401(k) already. It also offers tax-deferred growth on investments (meaning assets will not be taxed until withdrawn), but you’re limited to $6,000 a year (plus an additional $1,000 if you’re 50+).
Roth IRA – Taxpayers can choose a Roth IRA instead of an IRA, or contribute to both an IRA and a Roth IRA as long as the combined amount doesn’t exceed the $6,000 for 2019 (plus $1,000 for those 50+). Reminder: Roth distributions are tax free (you’re paying tax upfront), whereas traditional IRA distributions are subject to taxation when you take those distributions.
SEP IRA – A Simplified Employee Pension (SEP) plan is available to any size business and allows for contributions of up to 25% of each employee’s W-2 earnings. Its maximum contribution limits are $56,000 for 2019 (plus an additional $3,000 catch-up contribution for those 50+). Down the road, you can convert your SEP IRA to an Individual 401(k).
SIMPLE IRA – A Savings Incentive Match Plan (SIMPLE) IRA acts a lot like a traditional IRA but has a contribution limit of $13,000, with a catch-up contribution of $3,000. Elective deferrals work just like a 401(k) plan. These plans are only available to companies with 100 or fewer employees, and once they’re set up, employers have to make certain contributions to their employees’ accounts every year.
That’s a quick rundown of some of the most common retirement plans, but there are others: defined benefit plans, money purchase plans, and governmental plans, to name a few. Questions? Contact us, 720.635.3180 or send an email via the web interface to learn more about the different types of retirement plans and what might work best for your company.