Maximum 401(k) contributions offer a shield from tax liability while allowing you to earn more money for retirement. Tax-deductible contributions to retirement accounts are subject to IRS limits, which may change from year to year. The individual 401(k) limit for 2020 is $19,500 for those under 50, and $26,000 for those 50+.
Has the 401(k) limit changed in 2020?
The IRS sometimes adjusts the maximum 401(k) limit based on cost of living increases. Last year, they allowed $19,000 in contributions. This year, the amount increased $500.
What catch-up contributions are allowed?
Catch-up contributions for those over 50 have increased $500 to $6,500. The 8.3% increase is well above the recent 1-3% annual inflation rates. This allowance can help you catch up on retirement savings if you started late.
What is the combined employer and employee 401(k) limit in 2020?
Most employer plans agree to match some or all employee savings. The employer match is free money on top of the $19,500 individual limit. The combined employer and employee contribution limit is $57,000 in 2020.
If you can’t afford to save to the full 401(k) limit, you should at least strive to meet employer match requirements. Plans vary from employer to employer, with some offering to match 50% of your contributions up to 6% of your salary, and others offering to match 100% of your contributions up to 3% of your salary.
What about Solo 401(k) plans?
The self-employed, freelancers, and solopreneurs can contribute to Solo 401(k) plans as both employee and employer. In 2020, the total amount allowed is $57,000, with another $6,500 allowed for those over 50. If you are eligible for the catch-up contribution, you can contribute up to $63,500 into a Solo 401(k) for 2020.
If you’ve already hit the maximum, you can add a cash balance plan to the mix to double or even triple your tax savings.
What about SIMPLE plans?
Companies with fewer than 100 employees may have a SIMPLE retirement savings plan. The contribution limit for SIMPLE 401(k), 403b, and IRA plans was raised by $500 to $13,500 in 2020.
What can you contribute to a 403b or 457 plan?
Contribution limits for 403b nonprofit and 457 government plans have also increased to $19,500.
What can you contribute to IRAs in 2020?
Contribution limits for Traditional and Roth IRAs remained unchanged at $6,000 for 2020. Those over 50 can catch up with an extra $1,000. Eligibility to contribute to IRA plans may be limited by your income range, marital status, and workplace retirement plan availability.
Should you hit the 401(k) limit?
Many Americans like to take advantage of Traditional 401(k) plan options because their contributions are considered pre-tax. Once that $19,500 is in your retirement account, it grows, tax-deferred, until you begin withdrawing that money in retirement. Also, contributing to your 401(k) limit reduces your annual income level at tax-time.
For instance, if you are under 50 years old earning $210,000/year, but you set aside the maximum $19,500, you will only be taxed on $190,500. The reduced tax burden also takes you from the 35% to 32% tax bracket for the year. Instead of paying $73,500 in taxes, you will be paying $60,800.
Financial advisers generally recommend setting aside 15 percent of your income for retirement.
