The IRS posted changes to its contribution rules for IRAs and 401(k) today, increasing both at or above the rate of inflation.
- IRA Limit Set at $6,000 and $7,000 for 50+ Year Olds: The IRS has increased the maximum contribution to an IRA in 2019 to $6,000, up from $5,500, +9%. If you are over 50 years old, you can contribute another $1,000 in a “catch-up” provision, for a total of $7,000.
- 401(k) Maximum Goes to $19,000 and $25,000 for 50+ Year Olds: Participants enrolled in a 401(k) plan will be able to set aside $19,000 of their salary next year, up from a $18,500 maximum level in 2018, +2.9%. 401(k) particpants over 50 years old can utilize the “catch-up” feature and increase contributions by another $6,000, for a total maximum contribution of $25,000.
I believe that one of the major reasons why the IRS allows 401(k) contributions that are 3-4X higher than IRA contribution is that the 401(k) product is simply a better retirement wealth creation vehicle.
Multiple Advantages of a 401(k) vs. IRA For Building Retirement Wealth: For individuals that are serious about building retirement wealth, I believe a 401(k) is the obvious choice, for multiple reasons. Here are some of the features that differentiate 401(k)s:
- Higher Contribution Ceilings: If you want to build retirement wealth, 401(k)s allow the maximum contributions, both from you and your employer.
- Fiduciary Oversight: 401(k)s have people overseeing the plan that have a fiduciary obligation to look after the participants’ best interests (this is a legal obligation, not just a moral obligation). The most important fiduciary is the plan sponsor, who determines the services and features of the plan.
- Plan Design: A 401(k) can provide a match to the participant’s contribution, which in many cases can nearly double the amount of savings per year. Other features, such as loans, make it easier to be aggressive about saving for retirement without completely loosing access to the retirement money.
- Investment Selection: The plan sponsor often enlists help to create a competitive investment line-up that is tailored to the needs of the participant pool. The investment selection can straightforward or sophisticated, depending on the circumstances.
- Participant Support: Well run 401(k)s have excellent participant support, which often comes from the recordkeeper and/or financial adviser. I believe the most effective educational support occurs in face-to-face enrollment meetings and ongoing 1-on-1 interactions.
The primary downside to some 401(k)s vs. IRAs is that there are additional fees associated with these extra services. Therefore, for individuals looking to manage and maintain their existing retirement balances, IRAs can be a cost effective Do-It-Yourself option.
To Create Retirement Wealth – 401(k)s Is Often The Right Answer: I believe utilizing a low-cost 401(k) option is a superior way to build retirement wealth. Today, I can structure a 401(k) that is has significantly lower fees and more services than I had when I was an employee at a Fortune 500 company just over a decade ago. Therefore, if you are a plan sponsor or participant who thinks your plan has high fees, give me a call and I will do a quick analysis to see where it stands relative to the competitive landscape.
Please call me if you would like to discuss your investment strategy and how to make your future more financially secure.