Major Upgrade for IRA’s in 2019

The humble Individual Retirement Arrangement, known in most sane circles as the IRA, is getting a level up in 2019.  IRA’s should be a big part of everyone’s retirement plan, whether you’re self employed or working for another company.

People who make too much money according to the IRS can’t take advantage of some of the tax savings that IRA’s offer.  Let’s forget about those people for now and let them swim in their vault of gold coins.  (But there is even a change there so read on Scrooge McDucks).

For the rest of America, IRA’s are a great place to save for retirement because they can reduce your tax bill. They also provide flexibility to choose your own investments which may not be available in a company 401(k) plan. 

Let’s see what’s in store for IRA’s in 2019:

Raise the Limits!

IRA’s have limits on how much you can contribute each year.  This is a bummer for us but makes sense from the government’s point of view.  If there were no contribution limits, people would be putting their entire salary into an IRA and not paying taxes on it for decades.  Those potholes would never get fixed and bombs would never get made!

So while there are limits in place to ensure the federal and state government’s get their piece of the pie, the limits are increased from time to time.

And 2019 is one of those times.  

For tax year 2019, individuals can contribute up to $6,000 into their IRA, up $500 from 2018.  This applies for Traditional and Roth, or a combination of the two.  The total contribution between all the accounts has to be $6,000 though.  The catch-up contribution limit will be the same, $1,000 extra allowed contribution for those 50 years and older.

There are a number of rules governing the tax deductible status of IRA contributions.  If you and your spouse don’t have a retirement plan at work or are self employed, then each of you can contribute $6,000.  Giving you a potential joint contribution of $12,000 for the year.  Not bad at all!

It’s also worth mentioning that 401(k) plan contribution limits have increased as well.  The new contribution limit is $19,000, up $500 from 2018.

There are many people who may not be able to contribute the maximum amount to an IRA.  Don’t let that deter you from contributing at all.  Set a monthly contribution for what you can afford to contribute.  Try to find ways to increase your income or decrease expenses to raise that contribution amount over time.

Phase in.  Phase out.

Just as there are rules governing HOW MUCH you can contribute to an IRA, there are also rules governing WHO can get the tax benefits of an IRA.  And these limits have changed for the better as well.

These “phase out” limits are different for Traditional and Roth IRA’s.  In general, contributions to a Traditional IRA are tax deductible in the year you contribute.  But you will owe taxes when you take the money out in the future.

Roth IRA contributions are not tax deductible in the contribution year but you will avoid paying taxes on future withdrawals.  So it’s a decision between getting a tax break now with a Traditional IRA or a tax break later with a Roth IRA.

If your income is too high on your tax return, you won’t be eligible for these tax benefits.  People with high incomes are taxed at higher rates, so this is another way for the government to make sure wealthy people don’t hide too much of their money and avoid paying taxes.

The good news is these phase out limits have slightly increased from last year, so more people will be eligible to contribute to IRA’s.  For the sake of simplicity, I’m only going to refer to the limits for those who are married filing jointly.  To see the info for all other tax statuses, click here.

For Traditional IRA contributions, the income limits differ if you or your spouse have access to a retirement plan through an employer.

If you DO have access to a retirement plan, the income limit to get a full deduction is $103,000 or less.  If you DO NOT have access to a retirement plan but your spouse does, the income limit is $193,000.  When neither spouse has access to a retirement plan, there is no income limit.

Roth IRA income limits are more straightforward.  If your income is $193,000 or less, then you can get the full tax deduction.  This is up $4,000 from 2018. 

So if you happen to fall within these new income limits, rejoice!  You get to save some taxes.

 It’s important to know about these IRA upgrades, but it’s even more important to take action.  If you were already maxing out your IRA contribution for 2018, all you have to do is add $41.67 to your contribution per month to max it out in 2019.

If you’re not quite at the point of being able to max out your IRA, just try to increase your contribution as time goes on and your income increases.