Contributed By Andrew Cook, CFP®, AIF®
On November 6, 2019, the Internal Revenue Service announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2020. The 2020 limits are contained in IRS News Release IR-2019-179.
HIGHLIGHTS OF CHANGES FOR 2020
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 catch-up contribution limit for employees aged 50 and over who participate in these plans is increased from $6,000 to $6,500.
The limitation regarding SIMPLE retirement accounts for 2020 is increased to $13,500, up from $13,000 for 2019.
The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the Saver's Credit all increased for 2020.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or his or her 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 neither the taxpayer nor his or her spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.)
Here are the phase-out ranges for 2020:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is $65,000 to $75,000, up from $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 $104,000 to $124,000, up from $103,000 to $123,000.
- 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, up from $193,000 and $203,000.
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
The income phase-out range for taxpayers making contributions to a Roth IRA is $124,000 to $139,000 for singles and heads of household, up from $122,000 to $137,000. For married couples filing jointly, the income phase-out range is $196,000 to $206,000, up from $193,000 to $203,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
The income limit for the Saver's Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers 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.
Key limit remains unchanged
The limit on annual contributions to an IRA 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.
Details on these and other retirement-related cost-of-living adjustments for 2020 are in Notice 2019-59 (PDF), available on IRS.gov.
Typically, funding employer sponsored plans (via payroll deductions) must occur by 12/31, but individual IRAs or Roths can still be funded up until your original tax filing deadline. Even if you get an extension, you cannot fund these past the date that your return would originally be due without extension. In addition, if you are a business owner or self employed, you maybe eligible to fund a company sponsored plan known as a Simplified Employee Pension (SEP). A SEP is the only employer sponsored plan that can be set up and funded after 12/31, up until your tax filing deadline. Contrary to IRAs or Roths, these can be funded up until your extended tax filing deadline.
If you qualify you can actually fund both your employer sponsored plan and an individual retirement account in the same tax years. If you are over the contribution limits to fund individual deductible IRA’s or Roth IRA’s you may want to consider funding a non-deductible IRA and then converting it to a Roth IRA. Spouses with no earned income can still fund individual retirement accounts based on their spouses earnings.
If you are over 70.5 and are charitably inclined you can actually make Qualified Charitable Distributions (QCD’s) directly from your IRA in place of your Required Minimum Distributions (RMD’s) to avoid income tax on RMD’s.
Some planning strategies entail complex reporting and may impact other aspects of your financial life. HHM Wealth is happy to help you identify appropriate tax and investment strategies.
For more information about retirement plan limits, please contact your plan advisor, or click here.
This article is contributed by HHM Wealth Advisors, LLC, and RPAG member firm. Visit www.HHMWealth.com or www.rpag.com. Neither HHM Wealth nor RPAG are in the business of providing legal advice with respect to ERISA or any other applicable law. The materials and information do not constitute, and should not be relied upon as, legal advice. The materials are general in nature and intended for informational purposes only.