The IRS is giving you more reasons to save for retirement! The IRS announced that they would be increasing the amount that employees can contribute to their 401(k) plans. Taxpayers under 50 can contribute up to $19,500 for 2020. The IRS announced the increase along with other changes in their Notice 2019-59.
The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $19,000 to $19,500. The increase in contributions is due to several factors, including the cost of living increases among other things. The catch-up contribution limit for employees who are 50 or older was also increased. They can now contribute up to $6,500. The limitation regarding SIMPLE retirement accounts was also increased for 2020 by $500.
Along with contribution increases, the income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to Roth IRAs and to claim the Saver’s Credit, all increased as well for 2020. Taxpayers can deduct their contributions to a traditional IRA if they meet certain conditions. If the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. If the taxpayer or their spouse is not covered by a retirement plan at work, the phase-outs of the deduction do not apply.
The Saver’s Credit, known as the Retirement Savings Contributions Credit, is a tax credit for low- and moderate-income workers who contribute toward their retirement. The tax credit does have income limits for those who qualify. The income limit for the tax credit 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.
While most contributions were increased, the limit on annual contributions to an IRS remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.