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6 Retirement Account Changes for 2020 You Should Know

Worried about retirement savings? Find out how six beneficial tax law adjustments coming in 2020 will help you cash in and save more money for retirement.

By
Laura Adams, MBA
Episode #615
saving for retirement
The Quick And Dirty

Due to cost-of-living changes, starting in 2020, there will be a variety of beneficial tax changes to retirement accounts. They include:

  • Higher contribution limits for workplace plans
  • Higher catch-up limits for workplace plans
  • Higher contributions limits for self-employed plans
  • Higher income limits for traditional IRA deductions
  • Higher income limits for Roth IRA contributions
  • Higher contribution limits for health savings accounts (HSAs)

Every year the U.S. Treasury evaluates what’s happening with the cost-of-living and inflation rate in our economy. Based on that data, the IRS is required to make a variety of adjustments in the tax law. Fortunately, many of the changes can help savers squirrel away more money for retirement.

I’ll highlight six upcoming retirement account changes you can expect in 2020. Get a head start and begin making plans to cash in on these adjustments.

6 Retirement Account Changes to Expect in 2020

Use these increased limits to boost your retirement savings in the new year.

1. Higher contribution limits for workplace plans

Starting in 2020, if your employer offers a workplace retirement plan, such as 401(k) or a 403(b), the base amount you can contribute will increase from $19,000 to $19,500. The same adjustment applies to most 457 plans and the federal government’s Thrift Savings Plan or TSP. You can have both a traditional and an after-tax Roth retirement account at work in the same year if your total contributions don’t exceed that annual limit.

So, make a goal to max out your retirement plan by updating your contribution percentage or dollar amount per pay period. You can make changes to your plan at any time during the year. In most cases, you can set up a higher contribution rate to begin at a particular time, such as on January 1.

You can make changes to your plan at any time during the year. In most cases, you can set up a higher contribution rate to begin at a particular time, such as on January 1.

If your company offers retirement matching as a perk, you’re allowed to exceed the base annual limit. The overall contribution limit, including employee and employer contributions, will increase by $1,000 to 100% of your compensation or $57,000, whichever is less.

2. Higher catch-up limits for workplace plans

The IRS cuts older workers some slack by allowing them to save more to retirement accounts. These “catch-up” contributions apply when you’ve reached age 50.

In the new year, catch-up contributions increase from $6,000 to $6,500 for most types of workplace retirement plans. This change is significant because it’s the first catch-up increase that we’ve seen in several years.

In the new year, catch-up contributions increase from $6,000 to $6,500 for most types of workplace retirement plans.

If you’re over 50, starting in 2020, you’ll be allowed to contribute $19,500 plus $6,500 for a total base limit of $26,000 to your retirement account at work. If you turn 50 before the end of 2020, don’t miss the chance to save an additional $1,000 for retirement.

And if your company offers retirement matching, the overall contribution limit for those over 50 will increase to 100% of your compensation or $63,500, whichever is less.

3. Higher contributions limits for self-employed plans

If you don’t have a job with a retirement plan, don’t worry, the IRS has you covered, too. If you’re self-employed, the amount you can save in a SEP-IRA or a solo 401(k) will be going up from $56,000 to $57,000 in 2020.

RELATED: 4 Ways to Start a Retirement Account as a Self-Employed Freelancer

4. Higher income limits for traditional IRA deductions

Unfortunately, neither the base contribution limit nor the catch-up limit for a traditional IRA will go up in 2020. It remains $6,000 and $1,000 respectively. However, the income limits for claiming a tax deduction on your traditional IRA contributions will rise slightly.

This rule only applies if you or your spouse have a retirement plan at work, and you also contribute to a traditional IRA in the same year. Note that you can always make IRA contributions when you (or a spouse) also have a workplace plan; however, some or all of your contributions may be nondeductible.  

The allowable deductions for 2020 will depend on your modified adjusted gross income and tax filing status as follows:

  • Singles get a full deduction when your income is below $65,000. There’s a reduced deduction if your income is between $65,000 to $75,000, and no deduction when you earn more than $75,000. These limits have increased by $1,000 from 2019.  
  • Married couples filing jointly get a full deduction when your household income is below $104,000. There’s a reduced deduction if your income is between $104,000 and $124,000, and no deduction when you earn more than $124,000 as a couple. These limits have increased by $1,000 from 2019. If you file taxes jointly and don’t have a workplace retirement plan, but your spouse does, there’s a different rule. You get a full deduction when your household income is below $196,000. There’s a reduced deduction if your income is between $196,000 and $206,000, and no deduction when you earn more than $206,000 as a couple. These limits have increased by $3,000 from 2019.  
  • Married couples filing separately have more restrictions, with no change for 2020. You get a reduced deduction if your income is up to $10,000, and no deduction when you earn more than $10,000.

To clarify, if neither you nor a spouse is covered by a retirement plan at work, these income limits don’t apply, and you’ll get a full tax deduction for making traditional IRA contributions. As long as you’re younger than age 70½ and have earned income, you’re eligible to contribute to a traditional IRA.

5. Higher income limits for Roth IRA contributions

Now, let’s talk about Roth IRAs. Just like with traditional IRAs, there won’t be an increase in how much you can contribute. The limits will remain $6,000 for base contributions and $1,000 for catchups when you’re over age 50. However, the income limits for being eligible to contribute to a Roth IRA will be going up next year.

The income limits for being eligible to contribute to a Roth IRA will be going up next year.

Unlike a traditional IRA, with a Roth IRA, there are income thresholds you can’t exceed to qualify to make contributions. If you earn more than the limit for your tax filing status, you’re prohibited from saving any money in a Roth IRA for that year.

For 2020, you can make Roth IRA contributions when your modified adjusted gross income is below the following thresholds:

  • Singles can make full contributions when your income is less than $124,000, with a phase-out range for reduced contributions up to $139,000. You’re ineligible to make contributions when you earn more than $139,000, which is a $2,000 increase from 2019.  
  • Married couples filing jointly can make full contributions when your household income is less than $196,000, with a phase-out range for reduced contributions up to $206,000. You can’t contribute when you earn more than $206,000 as a couple, which is a $3,000 increase from 2019.  
  • Married couples filing separately have more restrictions, with no change for next year. You can only make partial contributions when your income is less than $10,000. You’re not eligible to contribute when you earn more than $10,000.

6. Higher contribution limits for health savings accounts (HSAs)

While changes to an HSA might not seem noteworthy for a post about retirement accounts, there’s a significant connection. Once you reach age 65, you can use an HSA just like a traditional IRA in retirement, with no penalty. You can take withdrawals for any purpose, with only income tax due on those distributions.

For 2020, the increased HSA contribution limits are as follows:

  • Individuals can save up to $3,550, which is a $50 increase from 2019
  • Families can save up to $7,100, which is a $100 increase from 2019

Higher contribution limits are good news for anyone with a high-deductible HSA-eligible health plan. Using an HSA to pay for qualified healthcare expenses is a smart way to cut your taxes, prepare for unexpected medical bills, and sock away extra money for retirement.

If you use an HSA correctly by only spending it on qualified healthcare expenses, you’ll never owe tax on your contributions or investment growth in the account. Plus, you don’t even need earned income to qualify for the account—you only need to have an HSA-qualified health plan. Those benefits top what you get from any retirement account!

This post isn’t a complete list of all the retirement-related tax changes coming in 2020. To learn more, visit irs.gov.

About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a trusted and frequent source for the national media. Her book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show. 

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