- November 8, 2019
- Posted by: Jonathan
- Category: Finance & accounting, Personal finance, Retirement, Retirement Planning
How much can you save for retirement in 2020?
If this question doesn’t get you excited, it should! Tax efficient savings are key. They are the easiest way to setup automatic savings (set it and forget it!), get employer matches (FREE money!) AND bring your taxable income down (Take THAT, tax man!). It’s a win, win, win situation for savers! Make sure to review your contributions and try to max out any of these plans that are available to you.
Key Takeaways
| CONTRIBUTION PLAN | 2019 | 2020 | CHANGE |
|---|---|---|---|
| 401(k), 403(b), most 457 plans | $19,000 | $19,500 | +$500 |
| 401(k) catch-up (if age 50 or older by year-end)* | $6,000 | $6,500 | +$500 |
| IRA | $6,000 | $6,000 | none |
| IRA catch-up | $1,000 | $1,000 | none |
| SIMPLE | $13,000 | $13,500 | +$500 |
| SIMPLE catch-up | $3,000 | $3,000 | none |
| HSA (individual) | $3,500 | $3,550 | +$50 |
| HSA (family) | $7,000 | $7,100 | +$100 |
| HSA catch-up | $1,000 | $1,000 | none |
| SEP IRA and Solo 401(k) | $56,000 | $57,000 | +$1,000 |
| Compensation limit | $280,000 | $285,000 | +$5,000 |
| Defined Benefit Plans | $225,000 | $230,000 | +$5,000 |
| Traditional IRA Phase-Out (single) | $74,000 | $75,000 | +$1,000 |
| Traditional IRA Phase-Out (married) | $203,000 | $206,000 | +$1,000 |
| Roth IRA Phase-Out (single) | $137,000 | $139,000 | +$2,000 |
| Roth IRA Phase-Out (married) | $203,000 | $206,000 | +$3,000 |
| Saver’s Credit (single) | $32,000 | $32,500 | +$500 |
| Saver’s Credit (married) | $64,000 | $65,000 | +$1,000 |
*The catch-up contribution limit for participants age 50 or older applies from the start of the year to those turning 50 at any time during the year. (If you were born on New Year’s Eve, you can still take it.)
How Much Should I Be Saving?
Maxing out these accounts is a fantastic way to save. It’s not always so easy but you should try to get as close as possible. Small steps help to ease the savings rate. Let’s say you need to be saving 15% to max out. Start with 5% and increase it by 1-3% every quarter!
All The Details
401(k), 403(b), 457
The annual contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan is $19,500 for 2020—a $500 boost over 2019. Note, you can make changes to your 401(k) election at any time during the year, not just during open enrollment season when most employers send you a reminder to update your elections for the next plan year.
401(k) Catch-Up
The catch-up contribution limit for employees age 50 or older in these plans is $6,500 for 2020. That’s the first increase since 2015 when the limit rose to $6,000. Even if you don’t turn 50 until December 31, 2020, you can make the additional $6,500 catch-up contribution for the year.
IRA
The limit on annual contributions to an Individual Retirement Account (pretax or Roth or a combination) remains at $6,000 for 2020, the same as in 2019. The catch-up contribution limit, which is not subject to inflation adjustments, remains at $1,000. (Remember that 2020 IRA contributions can be made until April 15, 2021.)
SIMPLE
The limit on SIMPLE retirement accounts goes up from $13,000 in 2019 to $13,500 in 2020. The SIMPLE catch-up limit is still $3,000.
HSA
The limits for health savings accounts (HSA) for 2020 goes up $50 for individual coverage and $100 for family coverage, bringing them to $3,550 and $7,100, respectively. The catch-up contribution limit for employees age 55 or older in these plans remains at $1,000
SEP IRA and Solo 401(k)
For the self-employed and small business owners, the amount they can save in a SEP IRA or a solo 401(k) goes up from $56,000 in 2019 to $57,000 in 2020. That’s based on the amount they can contribute as an employer, as a percentage of their salary; the compensation limit used in the savings calculation also goes up from $280,000 in 2019 to $285,000 in 2020.
Aftertax 401(k) contributions
If your employer allows aftertax contributions to your 401(k), you also get the advantage of the $57,000 limit for 2020. It’s an overall cap, including your $19,500 (pretax or Roth in any combination) salary deferrals plus any employer contributions (but not catch-up contributions).
Defined Benefit Plans
The limitation on the annual benefit of a defined benefit plan goes up from $225,000 in 2019 to $230,000 in 2020. These are powerful pension plans (an individual version of the kind that used to be more common in the corporate world before 401(k)s took over) for high-earning self-employed folks.
Traditional IRA Phase-Outs
You can earn a little more in 2020 and get to deduct your contributions to a Traditional IRA.
Note: Even if you earn too much to get a deduction for contributing to an IRA, you can still contribute—it’s just nondeductible.
In 2020, the deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $65,000 and $75,000, up from $64,000 and $74,000 in 2019. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $104,000 to $124,000 for 2020, 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 in 2020, up from $193,000 and $203,000 in 2019.
Roth IRA Phase-Outs
The inflation adjustment helps Roth IRA savers too. In 2020, the AGI phase-out range for taxpayers making contributions to a Roth IRA is $196,000 to $206,000 for married couples filing jointly, up from $193,000 to $203,000 in 2019. For singles and heads of household, the income phase-out range is $124,000 to $139,000, up from $122,000 to $137,000 in 2019.
If you earn too much to open a Roth IRA, you can open a nondeductible IRA and convert it to a Roth IRA as Congress lifted any income restrictions for Roth IRA conversions. This is called a Backdoor Roth.
Saver’s Credit
The income limit for the saver’s credit for low- and moderate-income workers is $65,000 for married couples filing jointly for 2020, up from $64,000; $48,750 for heads of household, up from $48,000; and $32,500 for singles and married filing separately, up from $32,000.
