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Maximum 401(k) Contributions

Contribution Limits for 2020

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There’s no question that saving for retirement through a 401(k) is an important step toward a more financially secure future. The question many people ask is; “What are my maximum 401(k) contribution limits and how much should I save?”

Retirement experts suggest saving at least 10% of your income – more if possible, for two reasons: By starting to save as much as you can now, you will have the freedom to choose how you want to live when you retire. And since your 401(k) contribution comes out of your check pre-tax, you lower your taxable income. In a way, it’s like paying for your 401(k) with money that you otherwise would have spent on your taxes.

Maximum 401(k) contribution

There are IRS limits on 401(k) contributions, but they still work in your favor.

Contribution
2020

Employee and business owner salary maximum annual contribution, including:

  • Pre-tax contributions and
  • Roth (post tax) contributions

$19,500

“Catch-up” contributions (for age 50 or older)

$6,500 (for a total of $27,000)

Employer matching or profit sharing contributions

25% of eligible compensation

Total maximum annual contributions for employees and business owners from salary

100% of income up to $57,000, plus $6,500 catch-up

*These limits may be increased by the IRS for cost-of-living adjustments each year.

401(k) contribution limits explained

Employee contributions

Employees and self-employed business owners may deduct a portion of their pay and have it automatically deposited into their 401(k) account each pay period as pre-tax contributions. If a 401(k) allows Roth contributions, the contributions may be made with income that has already been taxed.

Or you can choose to use a combination of pre-tax income and after-tax income as  Roth contributions. No matter which type is chosen, there is one max 401(k) limit–$19,500 for 2020.

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Pre-tax 401(k) contributions

Pre-tax 401(k) contributions are not included in the saver’s earned income when calculating income tax owed for the year. The tax liability on these saved dollars is deferred until you decide to withdraw funds from the 401(k) and they are distributed from the plan at retirement age. Most savers who choose this pre-tax option benefit because it lowers their taxable income during the years they are contributing to their 401(k), allowing them to pay less income tax. The net benefit is that you save for retirement and reduce your tax burden while you are working, however when you retire and start to withdraw from your 401(k), you will have to pay taxes on these funds.

Roth 401(k) contributions

Roth 401(k) contributions are included in taxable income for the year the saver contributed to their 401(k). Although the tax is paid on this money when it goes into the 401(k), Roth 401(k) contributions are distributed tax-free in retirement, including any investment earnings in the Roth account if taken out of the 401(k) after the employee is age 59½, disabled, or deceased.

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Catch-up contributions

Most plans allow individuals who will be age 50 or older before the end of the year to save an extra $6,500 each year in a 401(k) as a catch-up contribution.

These additional contributions are permitted to help individuals who are nearing retirement make up for prior years when they may not have been able to save in a 401(k). This contribution can be pre-tax or Roth (post-tax, as permitted by the plan your employer has designed.)

 

Employer contributions

Employers are generally not required to contribute to a 401(k) on behalf of their employees, but many do.

Employers can choose what type of contribution to make and may select certain requirements employees must meet to be eligible to receive an employer contribution. For example, some employers require employees to be employed on the last day of the plan year.

Common types of employer contributions

  • Matching contributions for employees who make pre-tax or Roth contributions (for example, 50 cents on each dollar contributed up to 6% of an employee’s pay)
  • Profit sharing contributions that are made for all eligible employees even those who choose not to make pre-tax or Roth contributions
  • Contributions required under certain plan design features such as a Safe Harbor 401(k)

Business owners who contribute to their employees’ retirement plans may take a tax deduction for their 401(k) employer contributions – up to 25% of eligible employees’ compensation.

“I find Ubiquity quite easy to work with. Being a small business, it is so nice to be able to call and receive help over the phone. Tony is very personable and knowledgeable. ”

- Nicole Brady, Geyser Equipment

Total 401(k) contribution limit

Employee contributions, combined with any employer contributions, cannot be greater than the individual’s income from the business for the year, up to a maximum of $57,000 for 2020. The annual dollar limit may be adjusted by the IRS for changes in cost-of-living.

 

Business owners

Business owners who establish a 401(k) plan for themselves may make contributions as both an employee of their company and as an employer, as well as receive all the associated tax benefits. A business owner can contribute up to $19,500 (plus a $6,500 catch-up contribution if over 50) as a deduction from their income, plus make a profit sharing contribution up to 25% of their income from the business for the year, for a total of $57,000. They may take a tax deduction for the total contribution amount (excluding for Roth 401(k) post tax contribution amounts).

Associates in tire factory.
“I find Ubiquity quite easy to work with. Being a small business, it is so nice to be able to call and receive help over the phone. Tony is very personable and knowledgeable. ”
- Nicole Brady, Geyser Equipment

Tips for saving

 

Anyone saving in a 401(k) can always change their saving rate. Some people start contributing at a lower rate, say 3-4%, and increase their contribution rate by 1–2% each year until they reach their chosen saving rate – or until they hit the IRS contribution limit.

Some people tie their annual savings increase to a day or events such as their birthday or a pay raise. Self-employed business owners may want to tie their contribution rates to profits each year or attaining specific sales goals.  What is important is that you save as much as you can early in life, so your early savings can grow to a very large amount over the years by collecting compound interest.

Here’s a real-world example of how small dollar amounts can really add up. If you spend $4 a day on coffee, with compound interest, and 20 years, you could have just shy of $50,000 in your retirement savings. It’s hard to determine how much you will need at retirement, especially when you’re young and retirement is seemingly far away. Life expectancy continues to increase based on medical advances and people aren’t retiring as young as they used to.

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Working beyond age 65 has become the societal norm, and out of necessity. By planning now, and maximizing contributions as much as you can, you are paying yourself forward and ensuring that you’ll be comfortable from the moment you stop punching the proverbial clock, to the moment you enter retirement.

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Setting up a 401(k) can be complicated

Only Ubiquity Retirement + Savings™ gives small business owners access to 401(k) experts in addition to industry leading low flat-fees. Each sales expert has over a decade of experience assisting business owners in 401(k) plan design. Take advantage of this free benefit.

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© 2020 Ubiquity Retirement + Savings
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44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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© 2020 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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