The Internal Revenue Service (IRS) made its annual announcement outlining changes to retirement account maximum contribution levels for the coming year. If you have not already begun saving for retirement, or if you are looking to keep pace with the changes in 2020, it’s never too early to plan to get the most out of your retirement savings efforts this year. Following is a breakdown of the key IRS updates and how you can make them work their hardest for your retirement plan.
Last year, the IRS raised the annual contribution limit for IRAs to $6,000. In 2020, the contribution limit remains the same. If you begin with January, save $500 a month into an IRA and you’ll reach $6000 IRA limit by the end of the year. If you did not contribute your full $6000 for 2019, you also have until April 15, 2020 to reach your $6000 limit. Setting up a consistent savings plan is the best way to reach your retirement goals, whether you’re just opening an IRA for the first time, or are continuing to contribute to one you already have.
In recent years, the IRS has increased the maximum contribution limit to 401(k) plans by $500 per year, and 2020 is no exception. In 2020, you’ll be eligible to contribute a maximum of $19,500 to your employee 401(k) plan, up from $19,000 in 2019. (For those doing the math, to contribute the full $19,500 for the year, you’ll contribute $1,583.33 per month.) No matter where you are on your financial journey, 401(k) contributions offer a great way to get closer to your savings goals. And however much you do contribute, the tax savings can really add up.
If you are over 50 years old, you are eligible for “catch up” contributions to your 401(k) as well as your IRA. This year, the maximum “catch up” contribution limit for 401(k) accounts has been raised to $6,500. For IRAs, the “catch up” contribution limit remains $1,000.
Also, the “SECURE Act” was signed into law on December 20, 2019. SECURE stands for “Setting Every Community Up for Retirement Enhancement,” and among other provisions around retirement issues, it pushes back the age for required minimum distributions to age 72 from age 70 ½ for those who reach age 70 ½ in the year 2020 and beyond. Your required minimum distribution is the minimum amount you must withdraw from your account each year. You can withdraw more than the minimum required amount. Your withdrawals will be included in your taxable income except for portions that were previously taxed or that can be received tax-free (such as qualified distributions from designated Roth accounts).
As long as you have earned income, beginning in 2020, age restrictions are no longer applicable on contributions to your Traditional IRA, just as they are not currently applicable on contributions to your 401k and Roth IRA.
Of course, it also means that as long as a you have earned income, you can contribute to your Traditional IRA beyond age 72, even as you are taking out the required minimum distribution. It is the same for the Traditional IRA, 401k, and Roth IRA.
Maxing out your contributions to your 401(k) or your IRA is a great way to supercharge your savings – but any increase to your annual contributions can help you reach your retirement goals faster. Even increasing your contributions by a percent or two can make a big difference years down the road.
One of the greatest ways to reach your goals faster is to take advantage of your employer’s “matching contributions” to your 401(k). Many employers will match a percentage of your 401(k) contributions to encourage you to participate in the program. This is basically free money that will grow tax free until you retire. Employer match typically works on a formula based on a number of factors, including salary, seniority, and amount contributed. Make sure you check with your employer to make sure you’re contributing at least the minimum eligible to collect the maximum employer contribution.
As you navigate through 2020, try to stay focused on your savings goals. IRA accounts and employee 401(k) accounts are a great vehicle to help you stay on track. With these announcements, the IRS continues to encourage us all to save for our futures.
And remember: if you have not yet maxed out your contributions for 2019, the IRS allows until April 15, 2020 to get it done!
Check with us to discover which IRA account is right for you.