What Is the Change to the Maximum 401(k) Contribution for 2020 for Over 50?
If you are over 50 years of age, you may contribute a maximum of $26,000 to your 401(k) plan in 2020.
Nearing retirement and trying to save a little extra? You’re in luck. There is a special provision for savers over 50 called a catchup contribution that can help you achieve your retirement goals.
What Is a Catchup Contribution?
A catchup contribution allows people ages 50 or older to make additional contributions to their retirement accounts. This rule applies to both 401(k) accounts, as well as individual and/or individual retirement accounts (IRAs) and allow for larger deferrals than the standard contribution limit.
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How did 401(k) catchup contribution limits change in 2020?
The catch-up contribution limit for employees 50+ increased by $500– from $6,000 to $6,500.
How much can you save for your retirement in 2020?
If you want to maximize your retirement savings, you can invest in multiple accounts:
- Save up to $7,000 in your IRA: The 2020 contribution limit for Traditional IRAs and Roth IRAs remained the same at $6,000, with $1,000 allowed for 50+ catchup contributions.
- Save up to $16,500 in a SIMPLE 401(k): The SIMPLE 401(k) contribution limit increased by $500 to $13,500. The catchup contribution amount is $3,000.
- Save up to $26,000 in a 401(k), 403b, 457, or TSP. The regular contribution limits increased by $500 — from $19,000 to $19,500, regardless of employee age. Employees over 50 can add $6,500.
Why did the IRS increase the maximum contribution limits?
The Internal Revenue Service announced these increases as “cost-of-living adjustments.”
History of catchup contributions
The catchup contribution provision was created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), so that older individuals would be able to set aside enough savings for retirement.
Employee catchup contributions have been allowed since 2002. Back then, employees could put away $11,000 for their retirement, plus an extra $1,000. The catchup contribution increased $1,000 every year from 2002-2006 and then remained at $5,000 for three years.
From 2009-2014, the over-50 catchup was $5,500. From 2015-2019, employees over 50 could contribute an additional $6,000 to their accounts.
When can you make catchup contributions?
“Catch-up contributions” allow people age 50 and older to set aside extra money to compensate for their younger years where they may not have saved enough. Generally, people earn more as they advance in age, which is why the magic number for catchups starts at 50.
However, you don’t have to wait until your 50th birthday to start catching up with your contributions. Technically, you can start putting in catchup contributions as of January 1 of the year you are set to turn 50.
Should you take advantage of the catchup contribution?
The tax benefit of a 401(k) catchup contribution can be huge. For instance, if you are a 50-year-old worker in the 24% tax bracket who contributes the full $26,000, you can reduce your tax bill by $6,240 — $1,560 more than younger workers.
High earners have the most to gain. If you max out your 401(k) in the 37% tax bracket, you could reduce your income tax bill by $7,215 in 2020; if you are married and your spouse maxes out, you’re in for double the savings.
Despite the great news, only 15% of plan participants are taking full advantage of their catchup contributions–either because they’re unaware the benefit exists, they haven’t prioritized their tax-advantaged retirement savings account, or they can’t afford to set aside the extra money.
Saving for your retirement can be easier than you think with our employee financial wellness tools. Contact Ubiquity to learn how to set aside the maximum amount for your retirement.