There’s some good news on the 2020 401k contribution limit front! Our favorite tax-advantaged account is getting a boost in 2020.
Every year the IRS announces their inflation adjusted figures for a variety of retirement accounts.
For 2019, employees are allowed to put in $19,000 into their 401k, 403b and most 457 plans. That’s a well appreciated $500 boost from 2018.
Luckily, this year is no different. According to a press release on the IRS website, we’re getting another boost in 2020.
The amount you can contribute to your 401k(or like account) goes up from $19,000 to $19,500 in 2020. This boost in the 2020 401k contribution limit is a welcome sight to those of us lucky enough to max out that account every year.
The 401k catch-up contribution limit for those 50 or older also goes up to $6,500 from $6,000 last year.
Honestly, I wasn’t expecting any changes this year. After all, the last two years saw a bump but that was after 3 years of inaction by the IRS. From 2015 to 2017, the limit stayed at $18,000. However, it’s very nice to see another change this year. A 401k represents one of the best deals around for employees. Being able to save an additional $500 tax-free doesn’t sound like a lot but it can add up over time.
The beauty of a tax-advantaged account is that you can defer your taxes till later on in life where it’s possible you are in a lower tax bracket.
For example, $500 invested across 30 years at a 7% growth rate will grow to $38k in a taxable account. However, that same amount will grow to $54k in a tax-free account.
A savvy investor can realize that it’s possible to keep your tax rate close to 0 near retirement(not too hard if you’re not a big spender) and that’s a big win for those utilizing the 401k.
The small $500 change in contribution limit can mean extra dollars for you in the future because of the tax benefits. On top of that, since you’re not paying taxes on an extra $500 now, you’ll have more take home pay to spend or invest in a taxable account versus investing it in a taxable account.
Unfortunately, unlike last year, the IRA contribution limit remains unchanged at $6,000.
Another bit of good news comes on the HSA front. 2020 HSA contribution limits are also rising a tad according to our buds at the IRS. Holders of an HSA account can now contribute $3,550 if single or $7,100 if on a family plan. That’s up from $3,500/$7,000 last year.
Oh baby, can’t wait to get that extra $100 in there as a family plan holder. It’s not a big change but the HSA is one of the best savings accounts out there. With an HSA, you defer taxes, avoid paying FICA if the contribution is done through the paycheck, and avoid paying taxes later if used to cover qualified medical expenses. Best of all, if you don’t have any medical costs, the HSA funds can be used for anything else once you turn 65 with no penalty.
Hell yea, I’ll take the extra $100.
There are a few other changes that may impact some people.
- After-tax 2020 401k contribution limits(if you have the option) rise to $57,000 from $56,000. This is an overall cap including your and your employers 401k contributions.
- SEP IRA and Solo 401k 2020 limits go from $56,000 to $57,000.
- The Simple account goes from $13,000 to $13,500 in 2020.
- The various phase-out ranges for traditional and Roth IRAs are changing and are shown here. Simply, they go up about a $1,000 from last year depending on your situation.
Overall, these change are a positive for all investors. Tax-advantaged accounts are some of the best saving tools possible. I’m always glad to see these numbers go up because of what it means to my savings. Investors should take advantage of these accounts whenever possible. Not only do they lower your taxable income which but they also allow your money to grow tax-free which is huge for your growth.
Tax-free growth is one of the best things you can get as an investor. It may not seem like much but these changes can make a big difference. I’ll take the $600 I’m getting this year and take advantage of it immediately. This change won’t impact a ton of people. However, if you’re already maxing out your 401k or HSA, it’s a welcome gift.
It’s always nice to see the IRS make changes that help investors. These guys get a lot of flack but sometimes, they do some good things too!