As workers weigh their open-enrollment benefit decisions for 2019, they may want to increase their payroll contributions to their 401(k). Here are some questions and answers about retirement savings.
Annual contribution limits for your workplace retirement plan are increasing by $500 next year. While that may not sound like much, the additional money can grow substantially over time, financial advisers say.
The IRS announced this month that the employee contribution limit for 401(k) and similar workplace retirement plans will be $19,000 next year, up from $18,500.
With 401(k) plans, workers save and invest part of their paycheck before taxes are taken out. The money isn’t taxed until it is withdrawn from the account.
Workers who are 50 or older also can make an extra $6,000 in “catch-up” contributions, an amount that isn’t changing for 2019. That means an older employee can contribute as much as $25,000 next year.
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The plans, named for a section of the tax code, have been around for 40 years. Fidelity Investments said the average balance in its 401(k) plans reached a record high of $106,500 in the third quarter of this year, and the number of people with $1 million or more in their accounts rose to more than 187,000.
So as workers weigh their open-enrollment benefit decisions for 2019, they may want to increase their payroll contributions to their 401(k).
“It’s a great time to review their strategy,” said Neal Van Zutphen, a financial planner in Tempe, Arizona.
He calculated that investing that extra $500 annually over 30 years, with a 7 percent average annual rate of return, would yield about $47,000 in retirement savings.
In general, advisers suggest contributing at least enough to receive your employer’s matching contribution. Many companies match payroll deductions — often 3, 4 or even 5 percent of your pay — to encourage workers to participate.
If you can afford to, increasing your contributions by 1 percentage point each year — say, from 5 percent of your salary to 6 percent — can make a big difference in the long run, said Brendan Mullooly, a financial planner in Wall Township, New Jersey.
Steven Brett, president of Marcum Financial Services in New York, offered this additional advice: “Start as early as possible and take advantage of compounding and time. The earlier you do it, the less you have to put away.”
If your employer doesn’t offer a retirement plan, you can open an individual retirement account. Contribution limits to IRAs are also increasing next year, for the first time in five years. For 2019, you can contribute up to $6,000, an increase of $500. People 50 and older can save an extra $1,000, for a total of $7,000.
Here are some questions and answers about retirement savings:
Q: Is it too late to contribute more to my 401(k) for 2018?
A: Marina Edwards, a senior director of retirement with Willis Towers Watson, suggested that workers ask their human resources department to provide an estimate of what their contributions will be for this year. If they haven’t met this year’s maximum contribution of $18,500, and can afford to put away more money, they may want to consider increasing their payroll contributions.
Q: Is it better to contribute to my 401(k) or to a health savings account?
A: Contribute to both if you are eligible, Edwards said. HSAs are special savings accounts available to people with certain high-deductible health insurance plans. Their “triple tax” benefit makes them an excellent way to save, she said. Money goes in tax free, grows tax free and is withdrawn tax free, when the money is spent on eligible health and medical expenses.
Many people confuse HSAs with flexible health spending accounts, which are geared toward short-term health needs, Edwards said. You can use the money in an HSA for current health needs if you must, but letting it grow long term is smart, she said, since most people will have health needs in retirement.
Edwards suggests a three-step approach: Contribute to your 401(k) up to the company match. Then fund your HSA, to the maximum if possible. (For 2018, individuals can contribute up to $3,450; the total rises to $3,500 in 2019. The limit for catch-up contributions by those 55 and older remains $1,000.)
Then, if you can afford it, contribute more to your 401(k).
Q: Anything else I should do to make sure my retirement savings are secure?
A: While you’re tweaking your plan contributions, Edwards said, take a minute to check that you have a strong password for your online retirement account, and review transactions to make sure there isn’t any suspicious activity. Retirement accounts are not immune to hacking, she said, so it’s wise to follow good online security practices.