If you contribute the maximum to a 401(k) or IRA, you’ll be able to increase your contribution in 2019.
Earlier this year, the IRS announced that employees can now contribute a maximum of $19,000 to their defined contribution retirement plan in 2019. This $500 increase from 2018 applies to:
- 457 plans.
- Thrift Savings Plans.
For years, the IRS has allowed employees 50 and up to make an extra catch-up contribution. This amount remains unchanged at $6,000. When combined with the regular 401(k) increase, an employee age 50 or older can save up to $25,000 next year.
The IRS has also increased the overall contribution limit from $55,000 to $56,000. This applies to employer and profit-sharing contributions.
The money you contribute as an employee to a qualified retirement plan is excluded from your taxable income. So if you contribute the maximum of $19,000 next year, your taxable income will be reduced by $19,000.
In addition to the tax deduction for contributions, 401(k) plans grow on a tax-deferred basis. This means you will not pay any taxes on the account assets until you begin withdrawing funds in retirement.
What are the new IRA contribution and deduction levels?
If you have an individual retirement account (IRA), you will be able to contribute up to $6,000 in 2019. That’s an increase from $5,500 this year.
According to the IRS, taxpayers can deduct traditional IRA contributions if they meet certain conditions. If you or your spouse are covered by a retirement plan at work, deductions for IRA contributions are subject to income phase-out ranges.
What is an income phase-out range? An income phase-out range determines who qualifies for tax credits based on their earnings.
Here are the income phase-out ranges the IRS announced for IRA deductions for 2019:
- For single taxpayers covered by a workplace retirement plan, the income phase-out range increased from $63,000 - $73,000 to $64,000 - $74,000. That means if your annual income is below $64,000, you can deduct all of your IRA contributions. If you bring home over $74,000 annually, you cannot deduct any IRA contributions.
- For married couples filing jointly, the income phase-out range increased from $101,000 - $121,000 to $103,000 to $123,000. To qualify, the spouse making the IRA contribution must have workplace retirement plan coverage.
- What if you're an IRA contributor without a workplace retirement plan, but your spouse has coverage? The deduction will phase out if your combined income is between $193,000 and $203,000 --- up from $189,000 - $199,000 in 2018.
- If you file a separate return as a married individual with a workplace retirement plan, the range remains at $0 - $10,000.
These deduction ranges do not apply if neither you nor your spouse has a workplace retirement plan.
How to capitalize on the new contribution limits
If possible, physicians should take advantage of the increase in contribution limits. If your employer offers a 401(k) plan, you should be contributing the maximum. Take advantage of any matching funds your employer provides as well.
After all, time is money. The sooner you begin contributing and the more you set aside, the more you will have in retirement.
For example, imagine you save $10,000 a year in your 401(K). You stick to this strategy for 10 years. Sounds pretty solid, right? For illustrative purposes, assume your account grows 5 percent a year. At the end of 10 years, your account would be worth a little over $132,000.
Now imagine you instead choose to invest the maximum of $19,000 over 10 years. At the end of the decade, assuming 5-percent account growth, you would have $251,000 saved!
Why retirement planning different is for doctors
According to Fidelity, you should aim to save 15 percent of your income each year for from ages 25 - 67. This includes employer-made contributions. This recommendation comes from the the idea you need between 55 percent and 80 percent of your pre-retirement income to maintain your lifestyle after work.
However, most doctors are either in medical school or residency at age 25. To make up for lost time, increase the percentage of your income you contribute each year.
If you can’t contribute the maximum or the 15 percent threshold, try to increase your contribution each year as your income grows. Many plans allow you to automatically increase your percentage contribution each year. For example, if you contribute 4 percent of your income this year, your plan will automatically contribute 5 percent next year.
The argument can be made that anyone should contribute as much as possible to their workplace retirement plan.
But for doctors, it's essentially a must. Not only because they can afford to; but also because they begin saving for retirement later than most. In doing so, it's important to consider:
- The new retirement plan contribution limits in 2019.
- The new deduction levels and phase-out ranges in 2019.
- What makes doctors different, and why they should take action now.
By maximizing your contributions now, you are setting yourself up for a retirement that is consistent with your current lifestyle today.