What is the maximum you can contribute to a retirement account this year?
The IRS just announced 2020 contribution limits for group retirement plans and individual retirement accounts. Each year the IRS considers cost-of-living adjustments to decide if they will increase the maximum amount an individual or business may contribute to a retirement account
For 2020, the amount you can contribute to a 401(k), 403(b) and other group retirement plans is up, but Traditional IRA and Roth IRA contributions remain the same.
The amount employees can contribute to a 401(k), 403(b) or similar employer sponsored retirement plan goes up to $19,500 in 2020 from $19,000 in 2019. The catch-up contribution limit for plan participants age 50 or older in 2020 also goes up to $6,500. This is the first increase to the employee catch-up contribution limit since 2015 when it was set at $6,000.
Keep in mind you can make changes to your 401(k) election at any time, not just during open enrollment season when most employers send you a reminder to update your benefits.
Traditional IRA and Roth IRA contribution limits are staying the same for 2020.
Catch-up contributions for individuals age 50 or older in 2020 are also staying the same. Even if you don’t turn 50 until December 31st, 2020, you can still make the additional catch-up contribution.
For small business retirement plans and self-employed individuals, the contribution limits are increasing for 2020.
The limit on SIMPLE IRA plans goes up to $13,500 in 2020 from $13,000 in 2019. The SIMPLE IRA catch-up contribution for those over age 50 will remain at $3,000.
The maximum amount small business owners can save in a SEP IRA or Solo 401(k) increases to $57,000 for 2020, up from $56,000 in 2019. That’s based on the amount they can contribute as an employer, as a percentage of their salary. It’s the lesser of the maximum contribution limit or 25% of salary.
The employee compensation limit used in the savings calculation for employer contributions also goes up to $285,000 in 2020 from $280,000 in 2019. The limitation on the annual benefit of a defined benefit plan increases to $230,000 in 2020 from $225,000 in 2019. A defined benefit plan is a powerful type of pension plan (the kind that used to be more common in the corporate world before defined contribution plans took over) for high-earning self-employed individuals.
Some other notable changes affect eligibility and deduction thresholds. For 2020 you can earn a little more and still get to deduct your pre-tax contributions to a Traditional IRA. Keep in mind, even if you earn too much to get a deduction for contributing to an IRA, you can still contribute—it’s just nondeductible.
In 2020, the deduction for taxpayers making contributions to a Traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes between $65,000 to $75,000, up from $64,000 to $74,000 in 2019.
For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $104,000 to $124,000 for 2020, up from $103,000 to $123,000. 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 $196,000 to $206,000 in 2020, up from $193,000 to $203,000 in 2019.
The cost-of-living adjustment helps Roth IRA savers too.
In 2020, the AGI phase-out range for taxpayers making contributions to a Roth IRA is $196,000 to $206,000 for married couples filing jointly, up from $193,000 to $203,000 in 2019. For singles and heads of household, the income phase-out range is $124,000 to $139,000, up from $122,000 to $137,000 in 2019. The Social Security wage base also increased to $137,700 from $132,900 in 2019.
Are you on track to reach your retirement goals? How much should you be saving to retire with confidence? Consider meeting with a fiduciary financial advisor to review your retirement game plan and start supercharging your retirement savings with these increased limits today.