What are IRS Retirement Savers?

What are IRS Retirement Savers?

In the form of higher contribution limits for 2020, the Internal Revenue Service (IRS) gave retirement savers an early holiday gift this year. Workplace retirement plan contribution limits would be increased in 2020 according to its November 6th announcement. And also in 2020, for Traditional IRAs and Roth IRAs’ income limits will also rise. 

For you to minimize your current tax bills, you should have larger contributions to retirement accounts. Additionally, for those who are making good incomes and/or those who are playing catch up for retirement, this higher retirement account contribution can be great.

Workplace Retirement Plans Contribution Limits for 2020

For the following types of retirement accounts, the employee contribution limit will increase from $19,000 to $19,500 in 2020:

  • 401(k) plans
  • 402(b) plans
  • Most 457 plans
  • Profit-Sharing Plans
  • Thrift Savings Plans
  • Cash Balance Pension Plans

The contribution limit will be increasing from $13,000 to $13,500 for those of you with a SIMPLE IRA at work. This may be the best time to ask your employer to upgrade your retirement plan to a 401(k), or something similar that offers larger contribution limits if your employer offers a SIMPLE IRA 

Workers who are 50+ have larger catch-up contribution

Contributing more to workplace retirement accounts is possible for workers who are at least 5 years old. The maximum catch-up contribution in 2019 to a 401(k) was $6,000. It will increase to $6,500 for the year 2020. 

That means that contributing a combined total of $1,000 more than they could have in the year 2019 will be allowed to workers who are at least 50-year-old. For example,  in the year 2020  worker is 55 years old and he can contribute up to $19,500 to his 401(k) plus $6,500 as the maximum catch-up contribution. This will equate to an investment of $26,000 into his retirement account if he makes the maximum contributions. Compared to the maximum amount he could have invested in 2019, this is $1,000 higher. 

On the following retirement plans, catch-up contributions are typically allowed

  • Thrift Savings Plan
  • Most 457 plans
  • 403(b)
  • 401(k)

Sadly, SEP IRAs do not have catch-up contributions. 

2020 contribution limits for Solo 401(k)

With a Solo 401(k), contributing as both the employer and the employee is possible for small business owners. For those who max out the plans, this could lead to some pretty nice tax savings. If you are an employee who is at least 50 years old, you can contribute the aforementioned $19,500 for 2020 and the catch-up contribution. For the year 2020, as both employee and employer, the total contribution limits have increased by $1,000 to $57,000. But the potential catch-up contribution of $6,500 is not yet included in that number. This means that for a Solo 401(k) plan,  contributing the maximum contribution limit of $65,500 is optional and possible for small business owners who are at least 50 years old.

Pension Plan Increase in 2020

A Cash Balance Pension should be checked out by small business owners who are maxing out their 401(k) or profit-sharing plan and who want to save more on taxes. An even larger pre-tax retirement plan contribution, when combined with a 401(k) profit-sharing plan, is allowed in this defined benefit plan. 

An increase from $225,000 to $230,000 will be effective on January 1, 2020, for the limitation on the annual benefit of a Pension plan. It will allow a larger contribution each year to the pension plan though this may not seem like a big deal. 

IRA Contribution Limits have no increase

For IRA or Roth IRA supporters, this is bad news plus some good news for you. The individual retirement maximum contribution limits are remaining the same. And, the catch-up contributions for individual retirement accounts will also remain the same. For an IRA and ROTH IRA in 2020, the catch-up contribution will be just $1,000. The cost-of-living adjustments for IRAs should be noted that these are not indexed to inflation. 

The good news is that for the year 2020, the income limits to fully contribute to a ROTH IRA or to fully deduct contributions to a Traditional IRA have increased. 

Your federal income tax-filing status and your income are where the income limits for both types of IRAs, ROTH or Traditional will depend. You can check out the IRS announcement for more details. 

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