The start of a new year comes with a variety of changes that can impact your retirement savings programs, perhaps most notably, the contribution limits for several important retirement vehicles.
With this information, you can prepare for your retirement savings in the year ahead. While these details can get a little mundane, the more we know the better we do, right? And besides, your financial advisor should help you remain proactive in your financial life by advising you on any adjustments you can make based on these updates. If he’s not, well, you know where you can turn (subtle, not-so-subtle self endorsement).
Ok, so periodically the IRS conducts a review of retirement savings programs and announces cost-of-living adjustments. For 2020, the IRS’ review resulted in an increase in contribution limits for some of the most popular retirement plans including your 401(k), 403(b) and 457. There’s also a few other changes in store for the coming year. Here’s a look at the key changes and how they might influence or impact your retirement savings efforts.
Increased Contribution Limits Across the Board
Come 2020, the contribution limit for the widely popular 401(k) account increases from an annual $19,000 to $19,500.
That means you have a slightly larger opportunity to shelter some income in the year ahead given that deposits to 401(k) accounts are made pre-tax and thus reduce your overall taxable income.
The IRS similarly increased contribution limits on the 403(b) and 457 plans (programs that cover non-profit and government employees) nudging up the threshold from $19,000 to $19,500 for 2020.
Contribution limits on the federal government’s Thrift Savings Plan, a program for civil service employees and members of the uniformed services, received an identical increase from $19,000 to $19,500.
Another change worth noting, this one for participants of SIMPLE retirement programs. Here too, the IRS has provided a cost of living increase for the annual contribution max, shifting it from $13,000 to $13,500. This change will be most relevant to employees of companies with 100 or fewer staff members.
401(k) Catch-Up Contributions
Are you lagging behind on retirement savings? If the answer to that question is yes, the good news is that the IRS has also provided a cost of living increase for what’s known as catch-up contributions.
Available to those who are 50 and over, the new annual limit for catch-up contributions has been shifted from $6,000 to $6,500. Notably, that’s the first increase since 2015 when the limit was made $6,000.
You’ll also want to remember that even if you don’t turn 50 until the final day of 2020, in other words December 31, you can still make the $6,500 contribution.
Income Range Adjustments for Tax-Deductible Traditional IRA Contributions
Yet another change being rolled out by the IRS in 2020 impacts the income range used to determine your eligibility for making tax deductible contributions to traditional IRAs.
Under tax laws, individuals may deduct contributions to their traditional IRA if certain criteria are met. For instance, as the IRS website explains in great detail, if during the year the taxpayer or his or her spouse was covered by a workplace retirement plan, the amount that can be deducted for an IRA contribution may be impacted, reduced, or even phased out altogether depending on overall income and filing status.
The key point to remember is that for 2020, the phase-out income ranges have been revised, allowing individuals to earn more before the IRA tax deduction is eliminated altogether.
For instance, for single taxpayers covered by a workplace retirement program, the phase-out income range is now $65,000 to $75,000, a slight increase from the previous limit of $64,000 to $74,000.
For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is now $104,000 to $124,000. This is a modest increase from the previous $103,000 to $123,000 range.
Meanwhile, 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. This new range represents an increase from $193,000 and $203,000.
It’s also important to note that for a married individual filing a separate return than his or her spouse, who is covered by a workplace retirement plan, the phase-out range did not receive an annual cost-of-living adjustment at all. In other words, it remains $0 to $10,000.
Roth IRA Contributions
The income phase-out range for tax-deductible Roth IRA contributions has also been updated for the year ahead.
Key points to note here:
- Taxpayers making contributions to a Roth IRA will face a tax deduction phase-out between $124,000 and $139,000 if the individual is a single or a head of household. This income range has been increased from the previous $122,000 to $137,000.
- For married couples filing jointly, the IRS cost of living adjustment has shifted the income range from $196,000 to $206,000 instead of the previous $193,000 to $203,000.
- Finally, the phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA did not receive a cost of living adjustment.
It’s also important to keep in mind that whether you’re contributing to a traditional or a Roth IRA, the limit on annual contributions to either account remains unchanged in 2020. It still sits at $6,000 annually (with an additional catch-up contribution of $1,000 for those age 50+ with earned income).
Max Out Your Contributions
No matter which retirement savings programs you participate in, if you can max out your contributions you are able to take full advantage of the expanded tax savings available in 2020.
If you need help deciding which programs will provide the most tax benefits or are ready to work with a financial advisor who can offer direction on ways to take full advantage of the financial tools available to you, consider reaching out to me.