As financial advisors we are always encouraging our clients to save more for retirement. We find that it's often best to set up the savings to come directly out of your paycheck so it's out of sight, out of mind. That's why we're so excited that contribution limits are increasing for many retirement savings plans in 2020.
401(k), 403(b), and TSP plans:
There are a couple increases coming to these plans in 2020. Contributions for those who are under age 50 will be able to contribute $19,500 annually up from $19,000 in 2019. Those over 50 can still contribute a catch-up amount, but that is also increasing from $6,000 to $6,500 next year. That means those over 50 can contribute a total of $26,000 to their retirement plan, a $1,000 increase over this year.
These contribution limit increases are the same for both regular 401(k) contributions as well as Roth 401(k) ones.
Some employers who don't offer 401(k) plans may offer SIMPLE IRAs instead as a way for both employees and employers to contribute toward retirement savings. If you're enrolled in this plan your contribution limits are also increasing from $13,000 to $13,500. However, unlike 401(k)s the catch-up contribution remains unchanged at $3,000. If you've over 50, the new maximum contribution is $16,500 for SIMPLE plans.
How about IRAs?
Many financial planners, including us, absolutely adore the Roth IRA. However, depending on your income, you may or may not be able to contribute to a Roth. The income threshold for Roth eligibility is increasing slightly in 2020. The income ranges for a joint tax filer will be $196,000 - $206,000 and $124,000 - $139,000 for single and head of household.
Although income eligibility has increased slightly for inflation, the contribution limits have not. For 2020 IRA contribution limits remain unchanged at $6,000 with a $1,000 catch-up for those who are 50 or older who still earn income.
While we're excited that many contribution limits have increased in 2020, this only matters to you if you take advantage of them! If you're able to contribute the maximum to your retirement savings plan you may need to update your contribution amount with your employer to fully contribute based on the increases. Otherwise, you may still be contributing at the 2019 levels.
For those who will be close to the Roth thresholds in 2019, you may be able to contribute in 2020 depending on your income. It's critical to do tax planning to ensure you are under the income limits if you make a contribution. Otherwise the contribution may be subject to taxes and penalties. For help determining whether a Roth contribution may be applicable to you, it’s best to speak with a financial advisor or tax professional.