Well, Christmas morning recently arrived for financial planners such as myself. What exactly arrived? The new 401k and IRA contribution limits for 2020. I know you are all as excited about this as I am, so let’s hit the highlights below.
- The maximum employee contribution for 401k and work-related plans (403b, 457, Thrift Savings Plan) is now $19,500. This is $500 increase.
- The workplace catch-up for those turning 50 or older has also increased $500 and is now $6,500.
- In a few months the overall defined contribution plan limit will be $57,000, which is a $1,000 increase from 2019.
- Sadly, contribution amounts for IRAs (Individual Retirement Accounts) has not increased for the new year. Those are $6,000 and then a $1,000 catch-up for 50 and older. Hopefully next year brings us a higher rate here.
- As a sidebar, 13% of employees who had a workplace retirement plan maxed out their contribution amounts in 2018. Not too shabby. For income earners above $150,000, this rate jumped to 60%. Nice job!
- Be sure to check with HR, payroll, employee benefits, or whatever your employer calls the department that handles your contribution rates because you should be able to change contribution rates during the year. This is typically not a situation where you can only select one time a year.
- Back on topic, the contribution amounts for SEPs and Solo 401ks has also increased from $56,000 to $57,000. This is based on employer contribution rates which is a percentage of their salaries. Salary compensation limits has increased from $280,000 to $285,000 in these situations.
- SIMPLE limits also increased $500 from $13,000 to $13,500 for 2020. The catch-up remains $3,000.
- If you have your own Defined-Benefit Plan (the kind for the high-earner and self-employed), your limitation for the annual benefit increases $5,000 to $230,000 in 2020.
- I’m not going to go into detail on the income phase-out ranges for IRAs with and without employer retirement plans. But, they have increased ever so slightly.
- The same applies for the income ranges for Roth IRAs phase-outs.
Again, this is one of the things I look forward to every year. Yes, I must not be right in the head, but I always get excited when people can save more for retirement and pay less in taxes to Uncle Sam…at least for now. If your retirement plan is not set up so your employee contributions do not increase automatically, please get with your payroll people to bump up that amount.