Retirement Compliance + Contribution Experts
Everyone wants a financially secure retirement, and for the majority of Americans, they save for it with a little bit of help from their employers. However, even with a 401(k) plan, it can be hard to get an early start on saving up for retirement–given your budget and immediate expenses.
That’s why it’s all too common for many individuals to reach their 50th birthdays before getting serious about their retirement plans and nest eggs. Policies and lawmakers have responded to this common occurrence by means of provisions in many tax-favored retirement accounts, which allow you to set aside extra contributions if you’re 50 or older.
For 2020, these provisions will allow for a sizable increase in the maximum contribution limits that older Americans can make to their employer-sponsored 401(k) plans. Not only will this allow individuals to take bigger steps in planning for their financial futures, it will also lead to additional savings in taxes!
At The Ryding Company, we know the ins and outs of retirement planning and compliance to help you navigate the process with ease. That’s why we want you to know all about the latest updates for 2020 401(k) contribution limits.
Keep reading to learn the details about this new provision. For any more questions regarding employer-sponsored retirement plans and compliance, don’t hesitate to contact The Ryding Company for our expertise and insight at 866.764.9222.
Catch-Up Contributions 101
To add a bit of history and context, 401(k) catch-up contributions were originally implemented by policy makers back in the early 2000s as part of modern tax reform efforts. These updates and provisions were important, since they acknowledged the undeniable fact that Baby Boomers were approaching retirement age, and that the majority of this sizable generation had not saved up enough for their retirement throughout their careers.
Because of this, various employer-sponsored retirement plans now allow for catch-up contributions, which include:
- » IRAs allow individuals who are 50 or older to contribute an additional $1,000 per year.
- » SIMPLE IRA and SIMPLE 401(k) plan participants receive a $3,000 catch-up contribution annually if older than the age of 50.
- » In 2019, 401(k) participants were allowed to contribute an extra $6,000 beyond their standard contribution limits.
- » Additionally, health savings accounts also provide for catch-up contribution of an extra $1,000, which are only available to those 55 or older–instead of using 50 as the eligibility age for most retirement plans.
401k Catch-Up Contributions In 2020
Because the tax law provisions take economic inflation into account, catch-up contributions are subject to increases–just like other prices and living expenses are expected to rise over time.
More often than not, though, most of these costs don’t change predictably from year to year, which means catch-up contributions don’t experience steady increases. As a result, the law requires that catch-up contributions remain the same until there’s enough of an adjustment to kick the number up to the next $500 increment. For example, back in 2015, the 401(k) catch-up contribution limit climbed from $5,500 to $6,000 in response to the economic climate.
For the first time in five years, 401(k) catch-up contributions are receiving an additional boost. Starting in 2020, individuals who are 50 or older will be able to set aside an extra $6,500 in their retirement plans. This higher amount also gets tacked onto the new base contribution limit of $19,500, now allowing for as much as $26,000 in total retirement savings just in your 401(k).
2020 Highlights + Updates
Navigating retirement planning and compliance isn’t easy. Here is a simple breakdown of the latest changes in contribution limits, so you can communicate it to employees and plan participants with ease!
- » In 2020, the overall contribution limit for employees who participate in 401(k), 403(b), the majority of 457 plans, and the federal government’s Thrift Savings Plan will experience an incremental increase of $19,000 to $19,500.
- » Similarly, the catch-up contribution limit for employees and plan participants who are 50 and over will increase from $6,000 to $6,500.
- » Also, the overall contribution limit for SIMPLE retirement accounts will increase to $13,500 in 2020, up from $13,000 for 2019.
- » When determining eligibility for deductible contributions into traditional IRAs, Roth IRAs, and Saver’s Credit, the income ranges will also be adjusted to reflect the 2020 increases.
2020 Deductibles + Phase Outs
Now, taxpayers will be able to deduct contributions for traditional IRAs if they meet certain conditions. If during the year either the taxpayer or his or her spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated–all depending on filing status and income. (If neither the taxpayer nor his or her spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.)
We’ve compiled the new 2020 phase-out ranges for your reference, here:
- » For single taxpayers that are covered by a workplace retirement plan, the phase-out range is $65,000 to $75,000, up from $64,000 to $74,000.
- » For married couples who file taxes jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $104,000 to $124,000, up from $103,000 to $123,000.
- » For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $196,000 and $206,000, up from $193,000 and $203,000.
- » For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
- » The income phase-out range for taxpayers making contributions to a Roth IRA is $124,000 to $139,000 for singles and heads of household, up from $122,000 to $137,000.
- » The income limit for the Saver’s Credit (also referred to as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $65,000 for married couples filing jointly, up from $64,000; $48,750 for heads of household, up from $48,000; and $32,500 for singles and married individuals filing separately, up from $32,000.
Key Limit Remains Unchanged
Despite all of these increases that aim to adjust catch-up contributions and deductibles to higher costs of living, the limit on annual contributions to a traditional IRA will stay the same in 2020 at $6,000. Also, the additional catch-up contribution limit for individuals aged 50 and over is not subject to change and will remain at $1,000.
Why It Matters
Even though the majority of individuals and plan participants won’t approach their 401(k) or other retirement plan contribution limits, it’s important to note that they can set more aside in 2020–whether they’re starting early or catching up.
For any additional questions about the latest increases in 401(k) catch-up contribution limits or to set up a consultation for your employer-sponsored retirement plan and compliance, feel free to contact the experts at The Ryding Company. Call us today at 866.764.9222 or contact a specialist here.