Most financial experts readily agree that when it comes to saving for retirement, your best bet is an employer-sponsored 401(k).
If you have the opportunity to save for retirement with a 401(k) and your employer has a matching program, jump on the chance, says Doug Carey, a retirement expert and president of WealthTrace, which provides financial planning software for consumers. “Contributing to a 401(k) plan when an employer matches contributions is still the single best way to save for retirement.”
Employer matching programs, in which companies contribute a percentage of what employees do to 401(k) accounts, are optional. According to the 401(k) Help Center, the most common type of match provided by employers in 2015 was 50 cents for each dollar up to a specified percentage of pay, which was commonly 6%.
As you make plans and adjustments to your retirement savings plan for the year, it’s a good idea to take a look at 401(k) contribution limits for 2019.
2019 401(k) employee contribution limits
As tax-advantage accounts, 401(k) retirement plans have a maximum annual employee contribution set by the IRS every year. This maximum contribution is the cap on how much you can contribute to these accounts over the year.
An employee can contribute up to $19,000 in 2019, up from $18,500 in 2018. If the individual is age 50 or older, he or she can contribute additional “catch-up” contributions of up to $6,000, which brings the contribution limit to $25,000 for the year.
Roth vs. traditional 401(k)
There are two types of 401(k) accounts, Roth and traditional. The contribution limits for both types of accounts are the same.
Roth plans allow you to pay tax on retirement savings now, so you don’t have to pay any tax when you retire and withdraw the money. These plans also allow you to withdraw funds that you’ve contributed to the account without penalties.
There are income limits associated with Roth IRAs. The chart below from the IRS details what those are for 2019. This table shows whether your contribution to a Roth IRA is affected by the amount of your modified AGI as computed for Roth IRA purpose.
|If your filing status is…||And your modified AGI is…||Then you can contribute…|
|Married filing jointly or qualifying widow(er)||< $193,000||up to the limit|
|> $193,000 but < $203,000||a reduced amount|
|Married filing separately and you lived with your spouse at any time during the year||< $10,000||a reduced amount|
|Single, head of household, or married filing separately and you did not live with your spouse at any time during the year||< $122,000||up to the limit|
|> $122,000 but < $137,000||a reduced amount|
Some 401(k) plans allow for hardship distributions from a traditional IRA, which means that there wouldn’t be a penalty. To be eligible for a hardship distribution, you must show an “immediate and heavy financial need,” according to the IRS. Some eligible reasons include certain medical expenses, payments to prevent eviction from your primary residence, burial and funeral expenses, repairs for certain damage to the home and possibly the costs associated with purchasing a principal residence.Traditional plans give you tax savings now, but you have to pay Uncle Sam later when you withdraw the money. There is also a 10% penalty if you withdraw any money from this type of retirement plan before age 59½.
Contribute enough to earn the employer match
Do your best to contribute enough money to your 401(k) plan to ensure that you get matching contributions from your employer. Most employers provide a match of 50% to 100% of employee contributions, as long as you contribute at least 6% of your salary each year. Employer contributions add up over time.
When to consider an individual IRA
There are several reasons why you might want to consider also opening an individual Roth or traditional IRA once you’ve gotten all of your employer match funds. 401(k) plans tend to feature various costs that can eat away at your investments. According to the Department of Labor, 401(k) fees include administration fees for the operation of the plan, investment fees and individual service fees.
Individual Roth and traditional IRAs don’t have as many fees, and you have greater control over the fees you do pay. With an individual IRA, you have a wider variety of investment options, including low-cost index funds or ETFS, such as those offered through USAA and TD Ameritrade. Such funds are “passively managed,” which means they usually feature lower management fees. They’re a good choice because they’re known for performing well over time.
IRA contribution limits
IRAs also have annual contribution limits. For 2019, you can contribute $6,000 or $7,000, if you are 50 or older.
Planning your retirement savings is an important process that requires some planning. To help you with that planning and in choosing the right money management company, check out SuperMoney’s Wealth Management and Brokerage Reviews page.o