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Posted by Debi G Hill, CPA

New IRS Contribution Limits: What does it mean for you?

New IRS Contribution Limits: What does it mean for you?

In the year 2020, how much do you think you can save for retirement? The 401(k) contribution limits are up, traditional IRA contribution limits stay the same, and almost all the numbers are up according to the inflation-adjusted figures for retirement account savings for 2020 announced by the Treasury Department. 

In 2019 you can contribute up to $19,000 to your 401(k) or similar workplace retirement plans but the amount will go higher to $19,500 in 2020.  If you are 50 or older in 2020, the 401(k) catch-up contribution limit for workplace plans will be $6,500 up from $6,000. But, if you are 50 or older, the amount you can contribute to n Individual Retirement Account stays the same for 2020: $6,000 with a $1,000 catch-up limit. 

Through these tax-advantaged accounts for 2020, you can sock-away $33,000 if you are super-saver and you are 50-plus. You can save even more if your employer allows after-tax contributions or if you are self-employed. From $56,000, the overall defined contribution plan limit moves up to $57,000. 

401(k)s

A $500 boost over 2019 will be implemented to the annual contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan and that will be $19,500 for 2020. Note that not just during open enrolment season when most employers send you a reminder to update your elections for the plan next year you will have a chance to do so but you can make changes to your 401(k) election at any time during the year. 

The 401(k) Catch-up

For the year 2020, for employees age 50 or older, the catch0up contribution in these plans is $6,500. Since the year 2015 when the limit rose to $6,000, this will be the first increase after it. Even if you don’t turn 50 until December 31, 2020, you’re free to make another $6, 500 catch-up contribution for the year.

Solo 401(k)s and SEP IRAs

In 2020, the amount that self-employed and business owners can save in a SEP IRA or a solo 401(k) will be $57,000 from $56,000 in 2019. The compensation limit used in the savings calculation will depend on the amount they can contribute as an employer and as a percentage of their salary; it goes up to $285,000 in 2020 from $285,000 in 2019. 

Aftertax 401(k) contributions 

You can get the advantage of the $57,000 limit for 2020 if your employer allows after-tax contributions to you 401(k). This includes any employer contributions (not catch-up contributions) plus your $19,500 salary deferrals (pre-tax or Roth in any combination) so it is an overall cap.

The SIMPLE

In 2019, the SIMPLE retirement account limit is $13,000 but in the year 2020, it will go up to $13,500. And, $3,000 is still the SIMPLE catch-up limit. 

Defined Benefit Plans

From $225,000 in 2019, the limitation on the annual benefit of the defined benefit goes up to $230,000 in 2020. For high-earning self-employed folks, these are powerful pension plans (an individual version of the kind that used to be more common in the corporate world before 401(k)s took over). 

Individual Retirement Accounts

In the year 2019, the limit on annual contributions to an Individual Retirement Account (pre-tax or Roth or a combination) is $6,000 and it will remain as is in the year 2020. The catch-up contribution limit will also remain at $1,000 and it is subject to inflation adjustments. Take note also that until April 15, 2021, 2020 IRA contributions can be made. 

Deductible IRA Phase-Outs

You can get to deduct your contributions to a traditional pre-tax IRA and you can earn a little more in 2020. Take note that you can still contribute even if you earn too much to get a deduction for contributing to an IRA -- it’s just nondeductible. 

For singles and heads of household who have modified adjusted gross income (AGI) between $65,000 and $75,000 in 2020, (up from $64,000 and $74,000 in 2019), and are covered by a workplace retirement plan will have the deductions for making traditional IRA be phased out. The income phase-out range will be $104,000 to $124,000 for 2020 from $103,000 to $123,000 for married couples filing jointly. 

If you are an IRA contributor who is not covered by a workplace retirement plan but you are married to someone who is, and both of your income is between $196, 000 and $206,000 in 2020, up from $193,000 and $203,000 in 2019, the deduction will then be phased out. 

Saver’s Credit

For married couples filing jointly for 2020, a $65,000 up from $64,000; for heads of household they have $48,750 from $48,000; and for singles and married filing separately have $32,500 from $32,000; this will be an income limit for saver’s credit for low-and-moderate-income workers. 

QLACs

The dollar amount you can invest in a qualified longevity annuity contract on your IRA or 401(k) is increased from $130,000 to $135,000. 

Debi G Hill, CPA
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