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These 2 IRA Changes Make It Easier to Save for Retirement in 2019

By Maurie Backman - Jan 28, 2019 at 6:17AM

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Good news: Building your nest egg just got easier.

Many workers who save for retirement do so in a 401(k). But if you don't have access to one through your employer, your next best bet is an individual retirement account, or IRA.

IRAs come in two main varieties: the traditional and the Roth. With the former, your contributions go in tax-free, but withdrawals are taxed in retirement. With the latter, you don't get an upfront tax break for contributing, but withdrawals during retirement are taken tax-free. Both options are solid ones for retirement savings, and this year, workers have an even greater opportunity to amass wealth, thanks to the following changes.

Golden egg with IRA printed on it on top of a pile of one-dollar bills

IMAGE SOURCE: GETTY IMAGES.

1. Higher contribution limits for traditional and Roth IRAs

One disadvantage of IRAs compared to 401(k)s is that they come with substantially lower annual contribution limits. That said, for the first time in half a decade, those contribution limits finally rose.

Between 2013 and 2018, IRA contribution limits held steady at $5,500 for workers under 50 and $6,500 for those 50 and over. But in 2019, those limits increased to $6,000 for workers under 50 and $7,000 for the 50-and-over set. This means that you now have an opportunity to sock away an additional $500 a year, which can benefit you in a number of ways.

First, saving more money means you stand to retire with more down the line. Let's imagine you're able to save an extra $500 a year over the next two decades. Assuming a 7% average annual return on investment during that period, you'd be looking at a nest-egg boost of over $20,000. Therefore, while a $500 yearly increase might not seem so substantial at first, it could put you in a much stronger financial position come retirement.

Secondly, the more you contribute to a traditional IRA this year, the more you'll lower your taxes. If your effective tax rate is 30%, socking away an additional $500 will reduce your 2019 tax bill by $150. Talk about a win-win.

2. Higher Roth IRA income limits

Roth IRAs offer a number of key benefits that traditional IRAs don't. Not only do they allow for tax-free withdrawals in retirement but they also offer more flexibility, since technically, you can withdraw your principal contributions (not your gains, though) at any time without penalty. Also, unlike traditional IRAs, Roth IRAs don't impose required minimum distributions in retirement. As such, your money is free to sit and grow in a tax-advantaged fashion for as long as you'd like during your golden years, or you can leave that money to your heirs if you so choose.

The only catch associated with Roth IRAs is that you can't contribute to one directly if your income exceeds a certain limit. Here's what those numbers look like for 2019:

Tax Filing Status

Contributions Are Reduced If Income Exceeds

Contributions Are Banned If Income Exceeds

Single, head of household, or married filing separately if you didn't live with your spouse during the year

$122,000

$137,000

Married filing jointly or qualifying widow or widower

$193,000

$203,000

Married filing separately if you lived with your spouse at any point during the year

$0

$10,000

DATA SOURCE: IRS.

While the $10,000 income limit for married folks filing separately and living together does not represent an increase from 2018, the other two figures do represent a jump. Formerly, singles, heads of households, or married folks filing and living separately had their Roth IRA contributions phased out starting at $120,000 in income, and contributions were barred completely at $135,000. For married couples filing jointly or qualifying widows or widowers, contributions were reduced at $189,000 in income last year and barred at $199,000. Therefore, more workers might manage to fund Roth IRAs this year as compared to last year.

That said, you can still contribute to a Roth IRA even if your income exceeds the above thresholds this year -- you just can't contribute directly. What you can do, however, is fund a traditional IRA and then convert it to a Roth. You'll pay taxes on the money you move over, but then you'll enjoy the benefits of a Roth IRA going forward.

And there you have it. The above IRA changes give you an even greater opportunity to save for retirement this year, so if you're looking to ramp up your contributions or start funding a Roth, now's your chance.

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