Posted by Fred Lake

New IRS Contribution Limits

New IRS Contribution Limits

Employers and employees all make contributions for retirement purposes every year. Internal Revenue Service is responsible for the collection of taxes and the enforcement of tax laws. The IRS has laid down the contribution limits of both the employer and its workers. There are some imposed limits to the amount an employer, employee, or self-employed individuals can contribute to their retirement plan every year. Every retirement plan must duly specify that contributions cannot exceed some set limits. There are different types of limits, which is a factor of the plan.

Contribution plans change as the year go by. From 2015-2018, the annual total contribution of an individual was not more than $5,500. For those that are aged 50 or above, theirs was $6,500. The new contribution cap set by the IRS has not much different from the contribution mentioned above limit. The latest contribution limit started in 2019. It remains valid even in 2020. In the new contribution limit, the entire contribution in both the traditional and the Roth IRAs cannot be more than $6,000 and $7,000 for those aged 50 or older. The traditional and Roth IRA are different in operation, and the difference between them is how and when they get a tax break. The decisive factor of the formal IRA is the fact that your inputs are tax-deductible in the year they are made, although there are rules to its deductibility in 2020 while that of the Roth IRA is that your withdrawals when you retire cannot be taxed.

New Contribution limits set by the IRS for 2020

The IRS usually sets the contribution cap. We have the following limits for the year 2020:

The 401(k), 403(b), 457 plans, and the Federal government Thrift Savings Plan. This was increased from $19,000 to $19,500. 401(k) is a form of a retirement plan that allows employees of a company to save for their retirement before taxes are deducted. The employer usually sponsors it.  403(b) is a form of a retirement plan that can only be used by employees of the public sector, nonprofit organizations, and other tax-exempt organizations. 457 plan is a form of retirement plan applicable to state and local government workers. Nonprofit career professionals can also use it as a contribution to their retirement. The 457 plan and the 401(k) plan have similar features, but it looks more attractive than it.

The SIMPLE retirement account limitation increased from $13,000 to $13,500.

There's an increase in phase-out ranges. This is to determine the taxpayer's eligibility to withdraw or remove the contributions made to the (IRA). A taxpayer can remove contributions made to the normal IRA accounts if they meet some conditions, like the Annual Income limit. In 2019, for an unmarried taxpayer, the phase-out income range was increased from $64,000 to $74,000. In 2020, it was increased from $65,000 to $75,000. Married couples also had theirs increased from $103,000 to $213,000 in 2019. While in 2020, it was increased from $104,000 to $214,000. For married couples, a single spouse can make the contribution

Note that the limit is on a taxpayer, not the account. With this, taxpayers can invest in both traditional IRA alongside a Roth IRA. This means one can invest in their regular account and also in their Roth account. The limit applies to both accounts, if both accounts get to the set limit where you can phase out, then you qualify for a reduction in tax credit. 

Excess IRA contributions

It's necessary that you strictly adhere to the stated contribution limits. This is because of the consequences of having excess investment in an IRA than you should. Every year, till you rectify the error, you will be subjected to a 6% excise tax.

If you want to fix excess IRA contributions, you should withdraw your entire invested funds. This should be done before you file your income tax. This is because investment in its contribution pulled out before the deadline is not regarded as a contribution by the IRS. In other words, this is as good as you not contributing. You should also withdraw your profits in the year.

Also, you can correct excess contribution by reducing the next year's investment by the excess of the mistake made. For instance, if you were supposed to invest $6000, but you mistakenly spent $8000, to correct this error, you can invest $4000 the following year, to balance up your investment.

Fred Lake
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