New IRS Tax Rule Impacting Your Retirement

iras taxes Apr 01, 2019

When it comes to retirement planning, we say all the time that there are very few hard and fast rules for what an investor should do.  Each investor faces a unique situation, with unique challenges and goals, and ultimately, unique strategies to get there. 

With that said, there is a general rule that most people are familiar with, and that rule is to utilize the tax benefits of a Roth IRA. Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free. Unlike with traditional IRAs where you avoid taxes when you put the money in, Roth IRAs allow you to avoid taxes when you take the money out, after it’s been able to grow. 

Roth IRA’s in comparison to their traditional counterparts, do not require any mandatory distribution along the life of the account.  Many investors are familiar with the 70 ½ age limit where traditional IRA’s have required minimum distributions, RMD’s, forcing account owners to withdraw a certain amount from the account.  Roth IRA’s ability to allow the account to grow without RMD’s isn’t just valuable for the original account owner, but also for those inheriting the account, that can stretch out the distributions over many years.

If you were to ask any savvy investor about the disadvantage of a Roth IRA, they would likely mention of contribution limit which, for most people, has been $5,500 a year.  Those investors aged 50 and over are able to contribute $1,000 more annually, for a total of $6,500. 

That well-known limit, which has been in place for the past five years, has now been increased by $500, allowing investors under age 50 to add $6,000 annually to their Roth IRA, and that $1,000 catch up contribution gets older investors to $7,000 a year.

This $500 increase is mirrored for many workers who have a 401(k), 403(b), most 457 plans, or a Thrift Savings Plan, who will now be able to set aside $19,000 of pre-tax funds, rather than the $18,500 allowed prior

That might not seem like much but TIME Money provided some math that can show the hidden value.  For someone who starts investing at age 30, and retirees at the average age of 67, 47 years later, that $500 a year increase for both the IRA and employee plan contributions can add up the $134,000 in retirement savings (assuming a 6% average return). Once again, the value of time within investing shows in the math, as just a little change can make a big impact down the road.

As I said in the opening, there are very few hard and fast rules that apply to all investors.  While many people will find a lot of value in taking advantage of this limit change, it isn’t a no brainer for everyone.  It’s important for you to take a holistic view of your financial strategy, and work with your financial advisor to see if a Roth IRA, and this increase in contribution limits, is something that you should budget for in your next investing year.

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