- Average income tax refunds are expected to increase 26% in 2019
- The IRS recently announced higher tax-deferred contribution limits for retirement accounts
- Plan sponsors look to education and plan design to help boost contributions
The Internal Revenue Service (IRS) announced that the contribution limit for 401(k), 403(b), and most 457 plans will rise to $19,000 next year, up from the current $18,500. Contribution rates for individual retirement accounts (IRAs) are also increasing by $500. In 2019, individuals will be able to contribute up to $6,000 in an IRA.
The catch-up contribution for individuals age 50 and older remains at $1,000.
Tax refunds projected to increase 26%
According to Morgan Stanley research (quoted by fortune.com), next year’s tax refunds could increase by 26%. The additional funds are likely to result from individuals maintaining the same withholding rates and overpaying in payroll taxes, in light of increases from the tax reform law. The timing of most refunds is February, the firm noted.
The IRS reported that the average refund in 2018 was $2,864, reflecting a 0.5% increase over 2017.
A separate Morgan Stanley survey found that about 65% of taxpayers put their 2018 refunds into savings. Another 35% paid down debt, while 12% went on a vacation and 8% made a significant purchase.
Tax reform results in small boost in income
Just Capital, a nonprofit research group, reported that the average worker received an additional $225 in 2018, either by a salary or bonus increase, as a result of tax reform. While many workers may not see this as an opportunity to add to savings, the additional income may add to investors’ feeling of confidence about their financial situation and give them greater inclination to devote some or all of their tax refunds to their retirement nest egg.
Employers encourage savings
Plan sponsors have many strategies to encourage saving. Recent research from BrightScope and the Investment Company Institute found that most companies offer an employer match. Among plans with more than $1 billion in assets, more than 60% use auto enrollment. More than 80% of 401(k) plans also offer loans.
Investment choices can be another strategy to boost participation. Many savers looking for a simple, "set it and forget it" investment select target-date funds. The number of plans offering target-date funds rose to 80% in 2015 from 32% in 2006.
Many employers also offer education programs to help participants gain financial literacy and confidence about their savings strategy.
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