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IRS Sets 2020 Retirement Plan Contribution and Benefit Limits

Nearly all of the dollar limits currently in effect for 2019 will experience minor increases for 2020.

The Internal Revenue Service (IRS) and the Social Security Administration have increased the amount employees can save this year in their employer-sponsored retirement accounts and the amount individuals can save in their IRAs.

The IRS limits contributions to 401(k)s, IRAs and similar retirement savings plans to prevent highly paid workers from receiving more tax benefits than average-paid workers. Contributions to 401(k) accounts and traditional IRAs are made with pretax dollars, which can significantly reduce the worker’s income tax burden for the year. The investments in these accounts grow tax-deferred, but withdrawals will be subject to income tax.

The 2020 cost of living adjustments are slightly higher than the 2019 dollar limits and apply to 401(k), 403(b) and most 457 plans:

  • A 401(k) is considered one of the best ways to save for retirement. This employer-sponsored retirement plan allows employees to contribute a portion of their income to the plan without paying taxes on it. Most companies will match a certain amount of the employee’s contributions.
  • 403(b) accounts are for private-nonprofit employees and government workers, including public school employees. Similar to 401(k) plans, 403(b) plans are a type of defined-contribution plan that allows participants to shelter money on a tax-deferred basis for retirement.
  • There are two types of 457 retirement accounts — 457(b) is offered to state and local government employees, while a 457(f) is for highly-paid non-profit employees.

A 457(b) plan’s annual contributions and other additions (excluding earnings) to a participant’s account cannot exceed the lesser of:

  1. 100 percent of the participant’s includible compensation, or
  2. the elective deferral limit ($19,500 in 2020 and $19,000 in 2019).

Additional increases to the general annual contribution limit may also be permitted (for more information visit the IRS website)

Other changes to IRS plans include:

  • Catch-up contribution: Employees who are 50 or older can contribute an extra $6,500 — up from $6,000.
  • SIMPLE (Savings Incentive Match Plan for Employees) retirement accounts: These accounts allow employees and employers to contribute to traditional IRAs set up for employees. Limits increased from $13,000 to $13,500.
  • IRA (Individual Retirement Account): Annual contributions remain the same at $6,000. Also, the additional catch-up contribution limit for individuals aged 50 and older is not subject to an annual cost-of-living adjustment and remains at $1,000.
  • Saver’s Credit (also known as the Retirement Savings Contributions Credit): This credit allows individuals to reduce their income tax dollar-for-dollar by up to $1,000 ($2,000 for Married Filing Jointly). The income limit for low- and moderate-income workers this year is $65,000 for married couples filing jointly, up from $64,000; $48,750 for heads of household, up from $48,000; and $32,500 for singles and married individuals filing separately, up from $32,000.

If your company sponsors a retirement plan, you should update your payroll and plan administration systems for the 2020 cost-of-living adjustments and incorporate the new limits in communications to employees, such as open enrollment materials and summary plan descriptions. We are pleased to help with plan designs that maximize tax savings and retirement benefits but wish to advise clients and their employees to also consult with a tax advisor. Please contact us for more information.