No matter our job titles here at Shepherd Financial, we are all nerds. Every last one of us. Case in point: every year, the IRS announces new contribution limits for retirement savings.
Because it’s vital information for how we operate, timeliness is essential – so at a meeting several weeks ago, I jokingly suggested there would be a prize for the team member that conveyed the new information to me first. Perhaps the IRS caught wind of our challenge; instead of releasing the limits mid-October, as they traditionally have, we waited with bated breath until November 1st.
(I’m completely serious when I tell you one team member set her Twitter account to alert her every time the IRS tweeted. She still didn’t win.)
In brief, the new limits: in 401(k), 403(b), and most 457 plans, the contribution limit was raised from $18,500 to $19,000. Not a huge jump, and the limit tends to increase by about that much every year. Significantly, though, the IRS has increased the contribution limit for traditional individual retirement accounts (IRAs) for the first time since 2013 (the limit is now $6,000).
But what’s the big deal, you might be asking? Essentially, the government has enabled Americans to save more. Larger retirement contributions can mean lower tax bills and more income in retirement. And if you happen to be an American with a late start on your retirement savings, this is good news. If you’re over age 50, between your 401(k), IRA, and catch up contributions, you could save $32,000 in 2019. That doesn’t even take into account an employer match or integrating a health savings account in your retirement investment strategy.
And that’s where saving smarter comes in. All these investment vehicles play a unique role in your overall retirement savings strategy. If you’re not sure about how to best utilize each one, call our team at Shepherd Financial. We nerds have a great time figuring this out every day.
If you’ve been around the past few months, you’ve probably seen that health savings accounts (HSAs) are all the buzz in the retirement industry. But what’s the fuss?
Well, a major fear for adults is that they’re going to run out of money to pay for health care or long-term care as they age. Studies estimate the average 65-year-old retired couple is going to need between $250,000 and $300,000 for out-of-pocket health care expenses, though some reports push those numbers over $400,000. Regardless, it’s an intimidating number, especially for employees already struggling to save for retirement.
So how can HSAs help? These tax-advantaged medical savings accounts were created in 2003 as part of the Medicare Modernization Act to provide Americans with more knowledge about and more control over their health care spending. HSAs are designed to help people save money for current and future qualified expenses.
An HSA can be a very effective companion to a 401(k) plan when preparing for retirement. And for certain employees, after qualifying for their employer’s matching contribution in the 401(k) plan, it could make sense to max out their HSA contributions. There are three primary tax advantages:
- Like a 401(k) account, employees can make pre-tax contributions, lowering their taxable income. Employers can also contribute to the account, either in a lump sum or with each paycheck.
- The money grows tax-free and, depending on the HSA’s features, can be invested for greater growth potential.
- As long as the money is used for qualified healthcare expenses, withdrawals and any investment gains are 100% tax-free. (If money is withdrawn before age 65 for any reason other than paying qualified medical expenses, there is a 20% IRS penalty, and the funds are considered taxable income.)
An HSA’s positive features don’t end with the triple tax savings – they’re individually owned and portable, which means employees have control of their accounts and can transport them from job to job. Unlike a flexible spending arrangement (FSA), HSA money isn’t forfeited at year-end.
Though there are contribution limits, HSAs allow more than just the account owner to contribute, because after-tax contributions are also permitted (and if made by the account owner, these contributions can also then be deducted on personal taxes). Additionally, individuals age 55 or older can make catch-up contributions.
Employees can easily miss out on an HSA’s advantages if they are not properly educated about its features. The Shepherd Financial team is equipped to help your participants better understand their whole suite of benefits; call us today to schedule an HSA-focused employee engagement meeting!
None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation.