Savers have an opportunity to contribute more money to retirement accounts in 2019. Participating in a retirement account can qualify you for tax breaks, make you eligible for valuable employer contributions and allow you to capture stock market gains. The new year is also a good time to take steps to reduce investment costs and fees that erode your returns. Consider these ways to better prepare for retirement in the new year.
Contribute $500 more to your 401(k). The contribution limit for 401(k) plans increases by $500 to $19,000 in 2019. You can defer paying income tax on approximately $42 more per month as a result of this change. “A New Year’s resolution that you can stick to is to change the contribution to your retirement account,” says Lauryn Williams, a certified financial planner for Worth Winning in Dallas. “It is as simple as increasing it, and the rest is automated.” The 401(k) catch-up contribution limit for those age 50 and older is an additional $6,000, so older workers can defer taxes on as much as $25,000 in a 401(k) plan in 2019. You don’t have to pay taxes on 401(k) contributions until the money is withdrawn from the account.
[See: How to Max Out Your 401(k) in 2019.]
Put an extra $500 in an IRA. The IRA contribution limit also increases by $500 to $6,000 in 2019. A worker in the 24 percent tax bracket could reduce his tax bill by $1,140 by maxing out a traditional IRA. Workers age 50 and older can make catch-up contributions of up to an additional $1,000 to an IRA in 2019, for a maximum possible IRA contribution of $7,000. If you can’t max out your retirement account, start saving a smaller amount and increase it over time. “Set a realistic, specific and measurable saving goal that you can control for 2019,” says Jason Speciner, a certified financial planner and founder of Financial Planning Fort Collins in Colorado. “If you’re saving 5 percent of your income today, odds are you can’t bring it to 15 percent overnight, but could you save another 2 percent of income per quarter for the year?” IRA contributions aren’t due until your tax filing deadline in April, so you can make a deposit shortly before filing your taxes to see exactly how much your tax bill will decline.
Get a 401(k) match. A 401(k) match is the fastest way to build your retirement account balance. If your employer will match funds that you save in the retirement plan, take care to deposit at least that amount in your 401(k) account. “If you get a 4 percent match to your 4 percent contribution, that is an immediate and guaranteed 100 percent return on that money,” says Robert Stromberg, a certified financial planner and president of Mountain River Financial in Abington, Pennsylvania. “It really is free money, and it’s immediately going to work for you through the magic of compounding, so it grows into an even larger sum of free money over time.”
Find out when you vest in your 401(k) plan. You don’t get to keep the employer contributions to your 401(k) account until you vest in the plan. While some companies provide immediate vesting of all employer contributions, others require several years on the job before you get to take any employer contributions with you if you leave the job or let you keep a portion of company contributions based on your years of service. If you are close to becoming vested in your 401(k) plan, sticking around for a few extra weeks or months could qualify you for thousands of extra dollars in retirement savings.
Set up tax-free retirement income with a Roth account. An after-tax contribution to a Roth 401(k) or Roth IRA allows you to earn tax-free investment growth and tax-free withdrawals in retirement. While you don’t get a tax break in the year you make a Roth account contribution, the benefits of a Roth IRA or 401(k) accumulate over time, and you don’t have to worry about a large tax bill in retirement.
[See: 9 Ways to Avoid 401(k) Fees and Penalties.]
Shop for lower cost funds. Choosing low-cost funds is particularly important for your retirement investments because you might hold these funds for decades. Take a close look at the expense ratio and other fees associated with your investments. Your 401(k) plan is required to send you an annual 401(k) fee disclosure statement that lists how much each fund in your plan costs to own. Consider moving your money into a similar fund with lower costs.
Check your diversification. The stock market experienced wild swings in 2018, and your holdings might no longer match your target asset allocation. Consider rebalancing back to the asset allocation that you have determined is appropriate for your risk tolerance. As you get closer to retirement, you may want to re-evaluate your holdings and shift part of your savings into lower-risk investments. “Examine your investment strategy. You will want to make sure that you take a Goldilocks amount of risk: not too much, but also not too little,” says Chris Chen, a certified financial planner for Insight Financial Strategists in Waltham, Massachusetts. “Remember, we humans are terrible at market timing. Now is not the time to try your hand at it.”
Monitor your My Social Security account. While most people no longer receive a paper Social Security statement in the mail, you can check your Social Security statement online by logging into your my Social Security account. It’s a good idea to view your statement annually with your tax return handy to make sure you are getting credit for the money you are paying into the program.
[Read: Social Security Changes Coming in 2019.]
See if you qualify for the saver’s credit. If you save for retirement in a 401(k) or IRA and earn less than $32,000 as an individual or $64,000 as a married couple, you may qualify to claim the saver’s tax credit. The saver’s credit is worth between 10 and 50 percent of your retirement account contributions up to $2,000 for individuals and $4,000 for couples, and can be claimed in addition to the tax deduction on a traditional retirement account contribution.
Take care to avoid retirement account penalties. There are 401(k) and IRA penalties if you take money out of your account too soon or too late. Aim to avoid withdrawals before age 59 1/2, which can trigger a 10 percent early withdrawal penalty, unless you qualify for one of the penalty exceptions. There’s also a much steeper 50 percent penalty if you don’t start taking required withdrawals after age 70 1/2. “Resolve to focus on and improve the things that you can control in your retirement finances and worry less about the things you can’t,” Speciner says. “This may mean that you stop watching the markets, but you start scrutinizing your budget or your risk management plan.”
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