The IRS has announced new contribution limits for tax-advantaged retirement plans. Learn the IRA and 401(k) contribution limits for 2020.
Income restrictions for IRAs have also increased for 2020
Every year the Internal Revenue Service (IRS) reviews inflation and other factors to determine the contribution limits for tax-advantaged retirement plans. Some years they remain unchanged. But other years the IRS increases the amount you can set aside in your 401(k) and Individual Retirement Account (IRA).
As we head into the new year, here’s what you need to know about 401(k) and IRA contribution limits for 2020 and how you can make the most of your retirement savings.
For the coming year, it’s possible to contribute more to your 401(k), with the maximum 401(k) contribution rising to $19,500 per year from $19,000. This increase also applies to 403(b) and most 457 plans, as well as government Thrift Savings Plans. The catch-up contribution, available to those 50 and older, goes up to $6,500 from $6,000.
For IRAs, the 2020 contribution limit remains the same at $6,000 per year. Remember that the contribution limit applies to all your combined IRA accounts, so if you have a Roth IRA as well as a traditional IRA, your combined contributions to both accounts can’t exceed $6,000. The catch-up contribution for those 50 and older remains the same at $1,000.
One of the benefits of a traditional IRA is that you can typically deduct your contributions. However, if you have a retirement plan at your work, or if your spouse does, the ability to deduct your IRA contributions phases out depending on your income and filing status. When you reach a certain income level, you can still take a deduction, but not the full amount. After you reach the upper phaseout limit, you can’t claim a deduction at all for IRA contributions.
If you have a plan from your workplace, most likely a 401(k), you have a better chance to claim a deduction for contributions to an IRA, providing a greater incentive to use more than one type of tax-advantaged retirement account.
It’s important to note that the income limits for Roth IRA contributions have also increased for 2020. You can contribute to a Roth IRA with income phaseouts based on your income and filing status.
If you’re married and filing separately, the income phaseout range for making Roth IRA contributions remains zero to $10,000.
The 2020 IRA and 401(k) contribution limits give you a chance to boost your retirement savings in the coming year. By increasing your contributions, you can make a long-term difference in your portfolio. The more you invest today, the better your opportunity for growth as you potentially take advantage of compounding returns and the tax efficiency of the investments.
Increasing your contributions can be fairly simple. By increasing your contribution from your paycheck by $41 each month, you can take full advantage of the ability to set aside an extra $500. So if you can spare $41 per month, you can grow your retirement account by contributing an extra $500 per year.
Couples also have the chance to increase their ability to plan for a joint retirement. Each spouse can make those contributions to an individual account. With the right approach, a couple could benefit by contributing an additional $1,000 to their retirement accounts in 2020.
If you’re 50 or older, you can contribute an additional $500 ($1,000 for couples planning a joint retirement) in catch-up contributions for a workplace retirement plan.
When compound returns are figured over the course of decades, the extra boost could make a significant difference.
Consider consulting with a retirement consultant about how you can make the most of the new contribution limits based on the types of accounts you contribute to. In some cases, a strategy that uses both traditional and Roth accounts can increase the overall tax efficiency of your retirement portfolio. A holistic approach can help you make sure your retirement goals fit with your other financial objectives, and a retirement professional can sit down with you and give you an outside perspective that keeps you on track.
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