If you are saving for retirement, there is good news for you in 2019. The IRS has raised the contribution limits on some of the most popular qualified retirement plans. This is good news for individuals who have a Self-Directed IRA. Why is that such good news? Well, the obvious reason is that you get to save more tax-advantaged money toward a comfortable retirement. Also, all those extra funds you contribute to your plan are now subjected to the magic of compound interest—interest on the interest that your account is earning.
While taxpayers are typically conditioned to view notices from the IRS with fear and trepidation, this is not the case with this announcement. Thanks in part to a rise in the inflation rate, this increase on the limits can have a dramatic effect on the size of your portfolio, especially if you are a few decades away from retirement.
Depending on the type of plan you use, there are also some immediate benefits. If you are saving into a Traditional IRA, for instance, your contributions are tax-deductible, which could mean you will have a smaller tax liability at the end of the year.
Here are the details on the plans that are affected and their revised limits:
Which plans are included in the raised limits in 2019?
- Contributions into Traditional and Roth IRAs increased from $5,500 to $6,000 for those younger than 50
- The catch-up contribution for 50 years and older remains at $1,000
- Maximum workplace retirement contribution amounts—401(k), 403(b), most 457 plans, and federal Thrift Savings Plans—increased from $18,500 to $19,000 with a $6,000 catch-up for workers who are 50 and older
- Annual employer limit for 401(k)-type plans, SEP IRAs and Solo 401(k)s increased from $55,000 to $56,000 in 2019
- Income limits and phase-outs have changed on some plans. Visit the IRS’s Highlights of Changes for 2019 for additional information
Don’t miss out on this opportunity
If you are a young worker, do not be fooled into thinking that you have plenty of time to worry about retirement. Starting early allows you to accumulate an impressive amount of retirement funds, and once you have amassed them, you can use them to diversify into assets that give you a chance for lucrative returns.
That’s why it’s critical, no matter what age you are, to contribute the maximum to your retirement account each year and take advantage of the power of compounding.
Compound interest is your greatest ally
As mentioned earlier, compound interest is an important player in the game of investing and saving. In essence, compound interest refers to “interest on the interest,” and it can make a tremendous difference when you have been investing for several years.
Here is just one example:
Michelle is a 35-year-old software engineer who has managed to save $25,000 in her Self-Directed IRA account. She uses her funds to invest in a commercial property that returns 8% annually, and she continues to add $500 each month to her account. By the time she reaches the age of 65, she will have a portfolio that is worth $1,018,572 with monthly compounding.
Of course, these returns are not guaranteed and any changes in the variables will affect the outcome. Be aware, however, that the 8% return is not an unreasonable figure. The S&P 500, which evaluates the performance of the stocks of the 500 largest companies in the New York Stock Exchange, has grown at a 12.25% rate since its inception in 1923. In a shorter window, its average return has been 10.72% since 1992.
Add diversity and growth with alternative assets
When you choose American IRA as your Self-Directed IRA Administrator, you will not be restricted to the investment options offered by most banks and brokerage firms. With a Self-Directed IRA, you can diversify your portfolio with real estate, a partnership, tax liens, and precious metals.