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It is common knowledge that, due to inflation, prices of goods and services are expected to rise over time, and the cost of living adjustment (COLA) helps to maintain the buying power of retirement payouts. The purpose of the COLA is to offset, or reduce, the effects of inflation on an individual's retirement income.
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Even though the COLA is mainly used for the Social Security program, it also plays an important role in private pension plans. Generally, it is the norm to gradually increase pension payout amounts based on the COLA to keep up with inflation.
For 2019, Social Security recipients and federal retirees will receive the highest COLA adjustment since 2012 as determined by the Consumer Price Index (CPI) upward trend. The 2019 cost-of-living adjustment of 2.8% for the Civil Service Retirement System (CSRS) and 2% for the Federal Employees Retirement System (FERS) annuitants was announced on October 11, 2018. (FERS became effective January 1, 1987 to replace the CSRS and to conform federal retirement plans in line with those in the private sector.)
The Social Security Administration announced that the 2019 limitation for the taxable wage base (meaning the maximum amount of earned income that employees must pay Social Security taxes on) increases from $128,400 to $132,900 for 2019.
The IRS has also recently announced the cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2019.
Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Secretary of the Treasury annually adjust these limits for cost of living increases.
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Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made following adjustment procedures similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.
Bellow are the highlights for year 2019.
The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $18,500 to $19,000.
The limit on annual contributions to an IRA, which last increased in 2013, is increased from $5,500 to $6,000.
The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
The income ranges for determining eligibility to make deductible contributions to traditional IRAs, to contribute to Roth IRAs and to claim the saver’s credit all increased for 2019.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.)
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| The phase-out ranges for 2019 for taxpayers making contributions to a traditional IRA are: |
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For single taxpayers covered by a workplace retirement plan, the phase-out range is $64,000 to $74,000, up from $63,000 to $73,000.
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For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $103,000 to $123,000, up from $101,000 to $121,000.
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For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $193,000 and $203,000, up from $189,000 and $199,000.
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For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
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The income phase-out range for taxpayers making contributions to a Roth IRA in 2019 is $122,000 to $137,000 for singles and heads of household, up from $120,000 to $135,000.
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| For married couples filing jointly, the income phase-out range is $193,000 to $203,000, up from $189,000 to $199,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000. |
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The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $64,000 for married couples filing jointly, up from $63,000; $48,000 for heads of household, up from $47,250; and $32,000 for singles and married individuals filing separately, up from $31,500.
There are some limitations that remain unchanged from 2018.
The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $6,000.
Effective Jan. 1, 2019, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $220,000 to $225,000. For a participant who separated from service before Jan. 1, 2019, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2018, by 1.0264.
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The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2019 from $55,000 to $56,000.
You can find dollar limitations for pension plans and other retirement-related items for tax year 2019 and technical guidance detailing these items in Notice 2018-83. |
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