What to know about possible new max contribution limits to your retirement accounts

Author: Josh Colton

October… break out the pumpkin scented candles, stock up on candy, pick out a Halloween costume and, oh ya, don’t forget the best part –  every October the IRS releases the new contribution/benefit limits for your 401k, 403B, IRA and other retirement accounts!

Ok, not everyone gets as excited as we do at Colton Wealth Management about the new limits, so for those of you who will not be diving into the upcoming IRS publication, here is what we think you should know:

Tax deductions

Early projections suggest that in 2019 we can expect increases in contribution limits of around $500 to accounts like your 401k, 403B, and 457 plans. That means contribution limits will reach a new high of $19,000 per year, so why does that matter?

TAX DEDUCTIONS! For some clients that are in the accumulation phase of their lives who are currently making max contributions to their retirement account’s this can mean additional savings on your tax return. Contributions to accounts like your 401k directly reduce your taxable income up to the contribution limit. Here is a quick chart you can reference to see how the projected increases will impact you:

How can a small increase of $500 help combat inflation?

Inflation is not your friend when it comes to investing. Simplified, inflation is an expected increase in prices year to year which reduces the purchasing power of the dollar over time. A lot of people think that the effects of inflation are seen only over long periods of time, like 100 years long. The reality of inflation is that it can more than half your purchasing power in as few as 30 years. For example, when factoring in the impact of inflation over time, something that cost $1.00 30 years ago (calculating the impact of inflation since 1988) would cost you $2.13 today!

Check out this cool inflation tool to see how inflation has performed historically!

The chart below shows how a yearly increase of $500 in retirement savings can impact your investments over time:

Investment increases of even $500 overtime can have a significant impact on your retirement and help maintain your lifestyle when inflation tries to eat away at it.

I am making the maximum contribution I can, what should I do now?

First, congratulations on taking this crucial step towards retirement! Once you’ve started saving we believe that you should focus on three things:

Make sure you are not paying high fees

Different investments have different fees associated with them. Even half a percent can have a significant impact on your retirement nest egg. Go ahead and scroll back up to the chart of how increases in $500 invested a year can impact your end retirement goal. By making the projected value a negative, you see the impact of decreases of just $500 a year to your investment portfolio over time. Needless to say, fees added up and left unchecked can leave you wishing you had noticed them sooner.

Make sure that you have the right risk allocation

Some incorrectly believe that age should be the determining factor of any individual’s risk portfolio. A typical formula is to take 100 and subtract your age. Some suggest that this simple one size fits all approach would give you the percent of your portfolio that should be allocated to stocks. When correctly determining your risk allocation, age is only one factor used in a formula that should look at your goals, emotional tolerance to volatility and investing time frame.

Don’t make silly mistakes

Here are just a few:

• Taking a loan from your 401k
• Failing to rebalance over time
• Not increasing contributions over time
• Not meeting your employer match
• Investing it all in employer stock

Every situation is unique, and every individual’s goals are different. At Colton Wealth Management we give unbiased fiduciary advice to help your goals become your reality. Book a free initial meeting where we can get to know each other by using the link below to send us an email or call us directly.