How Much Can You Contribute To Your 401(k) For 2020?
For those looking to put the maximum amount of money into their retirement accounts each year, the Internal Revenue Service (IRS) has some good news for you. Contribution limits for 401(k) and profit-sharing plans have increased for 2020. Workers will be able to sock away an extra $500. For those who are at least 50 years old, you can put away another $500 beyond that.
One of the easiest ways to save for retirement is to contribute to your employer-sponsored 401(k) plan directly from your paycheck. You likely won’t even miss the money, and you will get some tax benefits for your contributions.
One of the best and most tax-friendly ways to build a nest egg for retirement is by contributing to an employer-sponsored 401(k) account. If your employer offers this benefit, jump in as soon as you can, because it’s never too early to start saving for retirement.
If you’re lucky enough to have an employer matching contribution, make sure to save at least enough to capture the full value of that benefit. Missing out on the employer match could end up being a million-dollar retirement mistake.
The New 401(k) Contribution Limits for 2020
The maximum amount you can contribute in 2020 to a 401(k) as an employee is $19,500. That is $500 more than the 401(k) limit for 2019.
If you are 50, or older, you can also make a catch-up contribution. For 2020, the catch-up contribution limit is $6,500. A $500 increase from 2019. That means workers who are 50, or older, can sock away up to $26,000 into a 401(k) for 2020.
When you choose the traditional 401(k) options, your contribution will be pre-tax. Those contributions will lower your taxable income and help cut your overall tax bill. For example, if you make $249,500, and you make the maximum contribution of $19,500, just $230,000 of your income would be taxed. Similarly, once the money is in your account, it can grow tax-deferred. You will not need to pay taxes until you make withdrawals from your 401(k).
Related: 2020 Retirement Plan Contribution Limits
Higher Solo 401(k) Contribution Limits for 2020
If you are self-employed or own a small business, you may be able to slash your tax bill even further with a variety of amazing small-business retirement plans. For example, with a Solo 401(k), small business owners can contribute as both the employee and the employer. For those who are willing and able to max out those plans, the tax savings could be in the tens of thousands of dollars, per year. Put plainly, the more income you have, the more valuable the tax savings will be.
As the employee of your business, you can contribute the aforementioned $19,500 for 2020, plus the catch-up contribution if you are at least 50 years old. Total contribution limits as both the employee and employer have increased by $1,000 to $57,000 for 2020. That number does not include the potential $6,500 catch-up contribution. That means small business owners who are at least 50 years old have the option to contribute the maximum contribution limit of $63,500 into a Solo 401(k) plan.
If you are self-employed and already maxing out your 401(k) plan, consider adding a cash balance plan to the mix. You may be able to double or triple your tax savings.
How Much Should You Save for Retirement in 2020?
If you have been smart and started early, you should shoot for saving at least 10% of your salary into your 401(k) each year. If you are starting later, that number could easily jump to 15-20%. At the bare minimum, you need to contribute at least enough to get the full employer match.
If you aren’t able to get to that 10-15% range, the most important thing is to get started. Even if you have to start small, you will be better off than not saving at all. I started putting away just $25, per month, into my first retirement account. For those who are starting smaller, make a point to increase it 1-2% every six months.
Related: How Much Should Your Have Saved for Retirement By Age?
401(k)s – Traditional vs. Roth – Which is Better in 2020?
One of the most common retirement savings questions is, “Which is better, a Roth IRA or Traditional IRA? The conversation is similar when talking about a Roth 401(k) versus a Traditional 401(k). With a Roth 401(k), you won’t get a tax deduction for contributions, but your money will grow tax-free and more importantly, can be withdrawn tax-free.
If you expect to be in a higher tax bracket in retirement, you should consider the Roth 401(k). Typically, it will most likely be more beneficial for younger workers or people who expect to make a lot more money in the future. On the flip side, if you are already in a high tax bracket and/or expect to be in a lower tax bracket in retirement, you should lean toward the traditional 401(k).
There are Required Minimum Distributions (RMDs) for 401(k) plans once you reach the age of 72. To avoid them, you may want to rollover your Roth 401(k) to a Roth IRA, which will allow you to keep your money growing tax-free. Roth IRAs do not have required minimum distributions at any age.
Side note: the Trump Tax Plan is throwing or record deficits (the government is spending way more than it takes in) that are driving up the national debt. Like your credit card bills, that debt will eventually have to be paid, which will likely translate into high tax rates at some point in the future.
Let’s make 2020 the year you get on track for retirement, or speed up the march to financial freedom. Work towards maxing out your 401(k). If you are just getting started, make sure to capture the entire employer match. It is like free money. For those who are already saving, look to increase your contributions.