Fifteen Percent – July 2019

One rule of thumb for funding retirement is to establish a savings rate of 15%. This savings rate is important because, unlike the market return on our investments, it is within our control. Some argue that this rate is too high, but experience has taught us that it is easier to work with abundance than it is to work with scarcity.

For the first time since 2013, the IRS has adjusted contribution limits for tax favored retirement accounts. The good news for savers/investors is that limits in 2019 are higher by $500. The so-called catch-up contributions for savers/investors aged 50 and older remain unchanged. Specifically, this means the annual IRA contribution limit is now $6,000 for savers/investors under the age of 50 and $7,000 for savers/investors aged 50 and older. If an employer doesn’t offer a retirement plan, the IRA is a fine place for anyone with an earned income to build meaningful retirement savings.

Contribution limits for employer sponsored 401(k) plans have also increased by $500 and the limit has always been much higher than for IRAs. The annual 401(k)-contribution limit is now $19,000 for participants under the age of 50 and $25,000 for participants aged 50 and older. ASG reminds all readers that the IRS allows savers/investors to participate fully in both personal IRAs and employer-sponsored retirement plans simultaneously. For example, a married couple filing jointly and over the age of 50 now have a combined annual contribution limit of $64,000 (not including employer matching dollars). This example assumes that both in the couple are working and that both respective employers offer a 401(k). ASG is aware that saving and investing this much money assumes a strong combined income and/or strict spending control.

Congress hasn’t acted on retirement legislation since 2006, but the House recently passed a bill (SECURE Act) that is now headed for the Senate. One notable feature in the bill is an increase in the age that Required Minimum Distributions begin for retirement accounts (from 70.5 to 72). ASG supports any legislation that offers older workers and retirees more choice in deciding how long to work or when to spend down retirement savings. Well known IRA consultant Ed Slott said, “I wish they went further. I would have liked to see them get rid of required distributions altogether.”

Thankfully, there is no Required Minimum Distribution for Roth IRAs. ASG promotes Roth IRAs for eligible savers/investors. Ask your adviser if a Roth saving/investment strategy or a conversion to Roth strategy makes sense for your individual circumstances. Under current law, no other account type offers tax-free gain, tax-free distribution, and tax-free transfer to heirs.

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