Every year or so, the IRS looks at retirement savings programs and adjusts cost-of-living estimates based on their review. For 2020, they decided to increase contribution limits for 401(k) and other retirement programs. Here is a review of some changes that may impact your retirement savings.
Contribution Limits Increased
For 2020, the contribution limits for a 401(k), 403(b), or 457 increased from $19,000 in 2019 to $19,500 for 2020. It’s not a huge increase, however, you will definitely want to review your elected deferral amount with your plan’s recordkeeper to ensure you are taking advantage of the increase.
If you participate in a SIMPLE IRA through your employer, it’s worth noting that these contribution limits adjusted as well from $13,000 to $13,500.
If you do not have access to an employer-sponsored retirement plan or you invest in your own personal IRA or Roth IRA, the limit on these retirement accounts increased as well from $5,500 to $6,000.
For those who are 50 or older, there is an allowance for you to be able to contribute a bit more in order to catch-up on your retirement savings. On employer-sponsored plans, such as a 401(k), you are able to contribute an extra $6,500 per year. With an IRA, however, you are able to contribute an extra $1,000 per year.
Income Limits for a Tax-Deduction
If you are looking for ways to lower your annual tax bill, one option is to make a contribution to a Traditional IRA. Whether or not you qualify for that tax deduction depends on your income and some other criteria set forth by the IRS.
For example, if you are covered by a workplace retirement plan, you may not be able to deduct as much as someone who is not covered by a workplace retirement plan even if your income is within the same range.
This income range, however, is what has been raised in 2020 allowing more people to qualify for a deductible contribution to a Traditional IRA. It’s best to review these income limits with your financial advisor or tax professional.
Roth IRA Income Limits
Income ranges for eligibility in making Roth IRA contributions were increased for 2020 as well. Some key points to keep in mind here are:
- Single Taxpayers: Can make the maximum $6,000 annual contribution if their Modified Adjusted Gross Income (MAGI) is $124,000 or less. If MAGI is between $124,000 and $139,000 they can make a partial contribution and anything over $139,000, no contribution is allowed.
- Married Filing Jointly: Can make the maximum $6,000 annual contribution if their MAGI is less than $196,000. If MAGI is between $196,000 and $206,000 they can make a partial contribution. Of course, anything above $206,000 a contribution is not allowed.
Take Advantage of Increases
If you’re currently maxing out your contributions to retirement savings plans, make sure you’re increasing your deferral rate to match the allowable increase. If you’re not currently maxing out your retirement contributions, you can still focus on raising your savings percentage every year by 1% or 2% each year. At some point, you will get to a place where you no longer notice the deduction from your paycheck and you’ll be well on your way to saving your way to retirement.
Need help deciding where or how much to save? Consider working with me to help you prioritize achieve your goals.