IRA and 401K limits increase for 2019

[Russ Smith]

Employee deferral amount.

Let's say Ouchie's 401k had 4% match. He puts on the 4% to get the match. Next step is he maxes out his HSA. After That, he circles back into the 401k and completes his employee contribution.

Typically, HSA accounts are only available if you participate in a high deductible health plan so if don't I am not sure if you can truly set up an HSA. I am hoping Ouchie may speak to that since
my wife and I don't have a deductible at all.

I think I get it a bit more now. At my last place I got into a high deductible Kaiser plan without intending to because of really poor information and Trinet's site with all the explanations not working that day. I was offered HSA but didn't take it. I'm with Kaiser again now but not a high deductible, so I probably don't have HSA.

I pay about 350 to 400 a month now for my medical but my company then reimburses it so there's a line item on my paycheck that deducts what I pay, and then adds it back. So right now my medical is free, although I suspect the amount they kick in every month is now taxable because of the way it's on the paycheck. But in my mind it's like getting an extra 400 a month or nearly 5K a year in salary. At my prior company I was paying for that high deductible plan with nothing kicked in from the company

 

[AZCB34]

Yes this is all correct. 402(g) is the Internal Revenue Code section that provides the maximum employee contribution limit for a 401(k) - sorry that just rolls off the tongue too automatically for me. And AZCB34 has the planning strategy down precisely. And is also correct about needing a high deductible plan to gain access to an HSA. However there is bipartisan support to introduce legislation that will do away with that requirement, so pay attention as it may become available to you in the future. Also, HSAs as a savings vehicle is gaining traction which means there’s a greater likelihood that they become populated with better investments in the near future (historically the investment selection has been neglected and thus poor).

Hopefully they will get off their asses on the HSA thing since we are closing in on retirement. Would love to sock stuff away for future health costs.

 

[Linderbee]

Employee deferral amount.

Let's say Ouchie's 401k had 4% match. He puts on the 4% to get the match. Next step is he maxes out his HSA. After That, he circles back into the 401k and completes his employee contribution.

Typically, HSA accounts are only available if you participate in a high deductible health plan so if don't I am not sure if you can truly set up an HSA. I am hoping Ouchie may speak to that since
my wife and I don't have a deductible at all.

Yes this is all correct. 402(g) is the Internal Revenue Code section that provides the maximum employee contribution limit for a 401(k) - sorry that just rolls off the tongue too automatically for me. And AZCB34 has the planning strategy down precisely. And is also correct about needing a high deductible plan to gain access to an HSA. However there is bipartisan support to introduce legislation that will do away with that requirement, so pay attention as it may become available to you in the future. Also, HSAs as a savings vehicle is gaining traction which means there’s a greater likelihood that they become populated with better investments in the near future (historically the investment selection has been neglected and thus poor).

Thank you both for replying--yes, we have a high deductible plan right now, so we do have an HSA.

What do you mean by "circles back" into the 401k and completes employee contribution? Why does the HSA have to come before the employee contribution? I'm understanding more and getting lost more, lol. We both contribute beyond the employer matching; I think I am putting in 14% to my 401k and matching for my company is 3%.

 

[AZCB34]

Thank you both for replying--yes, we have a high deductible plan right now, so we do have an HSA.

What do you mean by "circles back" into the 401k and completes employee contribution? Why does the HSA have to come before the employee contribution? I'm understanding more and getting lost more, lol. We both contribute beyond the employer matching; I think I am putting in 14% to my 401k and matching for my company is 3%.

So the employee contribution limit into a 401k is 18500 for 2018 (under the age of 50). So let's say in order to get the match you need to contribute $4000. The next step could me maximizing the HSA which for a family is $6900 for 2018. After that you go back to the 401k (circling back) and start contributing without exceeding the 2018 limit.

The benefit of doing it that way is the tax treatment of the HSA. If you use the money for qualified medical expenses you never pay taxes on the amount whereas with a 401k or IRA you never avoid taxes short of being in a Roth 401k. There is also no RMD requirement on an HSA.

There are some nuances in the HSA once you turn 65 but not sure we need to get into that except to say the qualified expenses that are eligible increase in number.

 

[Linderbee]

So the employee contribution limit into a 401k is 18500 for 2018 (under the age of 50). So let's say in order to get the match you need to contribute $4000. The next step could me maximizing the HSA which for a family is $6900 for 2018. After that you go back to the 401k (circling back) and start contributing without exceeding the 2018 limit.

The benefit of doing it that way is the tax treatment of the HSA. If you use the money for qualified medical expenses you never pay taxes on the amount whereas with a 401k or IRA you never avoid taxes short of being in a Roth 401k. There is also no RMD requirement on an HSA.

There are some nuances in the HSA once you turn 65 but not sure we need to get into that except to say the qualified expenses that are eligible increase in number.

Why not just do it all at once?

 

[AZCB34]

Why not just do it all at once?

From a practical standpoint you really can't given how a 401k is funded...through payroll deduction.

 

[Linderbee]

From a practical standpoint you really can't given how a 401k is funded...through payroll deduction.

All of ours is through payroll (HSA contributions--which also has an employer match). I'm not trying to be obtuse...I'm just trying to figure out if we should be doing things differently to max out benefits, etc.

 

[Ouchie-Z-Clown]

Thank you both for replying--yes, we have a high deductible plan right now, so we do have an HSA.

What do you mean by "circles back" into the 401k and completes employee contribution? Why does the HSA have to come before the employee contribution? I'm understanding more and getting lost more, lol. We both contribute beyond the employer matching; I think I am putting in 14% to my 401k and matching for my company is 3%.

What I mean is, if you can max out both your 401(k) and your HSA without dipping into using the HSA for current medical (you’re better off coming outta pocket and letting that money build up over years of earnings and compounding), do it.

But if you can’t and you have to prioritize you should do so like this:

1. Make sure you are getting all of the match offered in the 401(k). If you have more $ to save . . .
2. Max out your HSA and don’t use. If you still have $ to save . . .
3. Put as much of it as you have remaining into the 401(k).

 

[Ouchie-Z-Clown]

So the employee contribution limit into a 401k is 18500 for 2018 (under the age of 50). So let's say in order to get the match you need to contribute $4000. The next step could me maximizing the HSA which for a family is $6900 for 2018. After that you go back to the 401k (circling back) and start contributing without exceeding the 2018 limit.

The benefit of doing it that way is the tax treatment of the HSA. If you use the money for qualified medical expenses you never pay taxes on the amount whereas with a 401k or IRA you never avoid taxes short of being in a Roth 401k. There is also no RMD requirement on an HSA.

There are some nuances in the HSA once you turn 65 but not sure we need to get into that except to say the qualified expenses that are eligible increase in number.

Yes well put.

 

[Ouchie-Z-Clown]

All of ours is through payroll (HSA contributions--which also has an employer match). I'm not trying to be obtuse...I'm just trying to figure out if we should be doing things differently to max out benefits, etc.

The timing of when to put in what where is really also dependent upon the design of your 401(k). If it offers a true-up on the match then the timing doesn’t matter. Just make sure you max out both of you can.

If there is no true-up on the match you want to make sure that you defer into the 401(k) over a prolonged enough period to max out your match. Because most matching contributions are made in a percentage of compensation earned most people don’t realize that if you pump your deferrals heavily at the beginning of the year you might hit the deferral limit (the $18,500 previously mentioned) to early to have maxed out your match. So again if your 401(k) doesn’t have a true-up make sure you do the calculation to figure out the optimal percentage of each of your paychecks to both max out the match and max out your deferral. I wish I could explain more easily.

 

[Linderbee]

Thank you both, very much, for taking the time to explain--I really do appreciate it. I think I understand enough to move forward (although this "true up" and "max out your deferral" is new, now). For the coming year, I think we'll try not do dip into our HSA as much as we have this year (we used it to pay for anything & everything we could).

Question you two may or may not know the answer to--if dcr leaves his company, can we keep our HSA account? What happens to that money then?

 

[82CardsGrad]

The timing of when to put in what where is really also dependent upon the design of your 401(k). If it offers a true-up on the match then the timing doesn’t matter. Just make sure you max out both of you can.

If there is no true-up on the match you want to make sure that you defer into the 401(k) over a prolonged enough period to max out your match. Because most matching contributions are made in a percentage of compensation earned most people don’t realize that if you pump your deferrals heavily at the beginning of the year you might hit the deferral limit (the $18,500 previously mentioned) to early to have maxed out your match. So again if your 401(k) doesn’t have a true-up make sure you do the calculation to figure out the optimal percentage of each of your paychecks to both max out the match and max out your deferral. I wish I could explain more easily.

Ouchie, can you elaborate on the true-up concept? You seem to be suggesting that a person can "hit the deferral limit too early?" How? And why should it matter when you hit the limit?

 

[puckhead]

Just want to say I'm really appreciating all of the great advice in this thread. Thank you so much to the pros for so generously dropping the knowledge in here!

I'll go back to lurking now.

 

[Zeno]

Ouchie, can you elaborate on the true-up concept? You seem to be suggesting that a person can "hit the deferral limit too early?" How? And why should it matter when you hit the limit?

I am guessing he is talking about what happens to people like me. In my case my employer matches per pay period not for the year. If I max out my contributions and still have pay periods left in the year I will no longer be able to contribute and my employer will not match (because it will appear I gave 0%). That's like leaving free money on the table.

 

[Zeno]

Does anyone know for sure about the rules for catch up contributions on 401Ks and IRAs? Can you not put in until you reach 50 or can you start the catch up contributions the year you turn 50? I have heard both but haven't found a clear answer. This is important to me as my birthday is in December and I'd like to start contributing the January after I turn 49 if that is the way it is (3 years away now).

 

[Zeno]

Does anyone know for sure about the rules for catch up contributions on 401Ks and IRAs? Can you not put in until you reach 50 or can you start the catch up contributions the year you turn 50? I have heard both but haven't found a clear answer. This is important to me as my birthday is in December and I'd like to start contributing the January after I turn 49 if that is the way it is (3 years away now).

Never mind I found my answer on the IRS website...

Individuals who are age 50 or over at the end of the calendar year can make annual catch-up contributions.

https://www.irs.gov/retirement-plan...oyee/retirement-topics-catch-up-contributions

 

[82CardsGrad]

I am guessing he is talking about what happens to people like me. In my case my employer matches per pay period not for the year. If I max out my contributions and still have pay periods left in the year I will no longer be able to contribute and my employer will not match (because it will appear I gave 0%). That's like leaving free money on the table.

So let's walk thru this... because I'm slow on the up-take!

Say your company plan provides for a match of 50% up to the first 6% of your contributions. Feel free to use example salary info if you like. But, if the company matches 50% up to 6% of your contributions, why would it matter when you hit the max contribution limit of $18,000? Your company will only match up to 6% of your contributions, no matter when you hit the limit, no?

 

[Ouchie-Z-Clown]

Thank you both, very much, for taking the time to explain--I really do appreciate it. I think I understand enough to move forward (although this "true up" and "max out your deferral" is new, now). For the coming year, I think we'll try not do dip into our HSA as much as we have this year (we used it to pay for anything & everything we could).

Question you two may or may not know the answer to--if dcr leaves his company, can we keep our HSA account? What happens to that money then?

An HSA is portable. You don’t lose it if dcr leaves his company.

 

[Ouchie-Z-Clown]

I am guessing he is talking about what happens to people like me. In my case my employer matches per pay period not for the year. If I max out my contributions and still have pay periods left in the year I will no longer be able to contribute and my employer will not match (because it will appear I gave 0%). That's like leaving free money on the table.

Yes you are exactly right. Let’s say the company matches 100% of deferrals up to 6% of your pay. If you defer a lot at the beginning of the year to “get it outta the way” you might leave some match on the table. Just for the sake of example let’s say you make $130,000 per year. If you’re paid every two weeks that’s roughly $5,000 per paycheck. If you decided to defer 50% that would be $2,500 you are putting into the 401(k). Your company would match 6% of the $5,000, or $300 each paycheck. At this rate you would hit the IRS limit of $18,500 within eight paychecks. That means you would’ve gotten a match of $2,400 ($300 x 8).

But at 8 paychecks you’ve only earned $40,000. But you hit the IRS limit so you can’t put in more. So you can’t earn more match.

If you deferred only 15% of your paycheck you would be deferring $750 of each paycheck. But you still get the 6% match on your paycheck, so that’s still $300 each paycheck. It will take 25 paychecks to hit the IRS $18,500 limit. If you get $300 match in each one you end up with a match of $7,800.

So spreading out your deferrals appropriately nets you more match.

If your company’s plan has a true-up at the end of the year they look back and say, our match is 6% of pay, you maxed out the IRS limit on your deferrals early and only received $2,400 of match. But your pay for the year was $130,000 and 6% of that is $7,800, so we will make an extra true-up match of $5,400 to bring your match up to the full 6% of $7,800.

Mind you, they do not have to offer a true-up. This is a decision they either do or do not include in their plan. If they don’t you should really stretch your deferrals like the 15% action above. If so provide a true-up it doesn’t matter.

 

[Ouchie-Z-Clown]

Just want to say I'm really appreciating all of the great advice in this thread. Thank you so much to the pros for so generously dropping the knowledge in here!

I'll go back to lurking now.

My pleasure.

 

[Ouchie-Z-Clown]

Never mind I found my answer on the IRS website...

Individuals who are age 50 or over at the end of the calendar year can make annual catch-up contributions.

https://www.irs.gov/retirement-plan...oyee/retirement-topics-catch-up-contributions

Yup you found it. You can start making catch-up January 1, 2019 if you turn 50 anytime in 2019.

 

[Ouchie-Z-Clown]

So let's walk thru this... because I'm slow on the up-take!

Say your company plan provides for a match of 50% up to the first 6% of your contributions. Feel free to use example salary info if you like. But, if the company matches 50% up to 6% of your contributions, why would it matter when you hit the max contribution limit of $18,000? Your company will only match up to 6% of your contributions, no matter when you hit the limit, no?

See my example.

 

[Zeno]

I hadn’t heard the term true up before and until last year I wasn’t aware of the dangers of reaching the limit with pay periods to spare. I can do either % or a set amount, I’d always done % before now I just divide the max contribution by the 26 pay periods and leave it at that so I don’t have to worry about maxing it out earlier.

 

[Ouchie-Z-Clown]

I hadn’t heard the term true up before and until last year I wasn’t aware of the dangers of reaching the limit with pay periods to spare. I can do either % or a set amount, I’d always done % before now I just divide the max contribution by the 26 pay periods and leave it at that so I don’t have to worry about maxing it out earlier.

Unfortunately most participants aren’t aware of dangers of maxing out early.

 

[Linderbee]

Unfortunately most participants aren’t aware of dangers of maxing out early.

The max only applies to YOUR contributions, then? The employer-matched funds are not counted?