There’s good news for retirement savers as we head into 2020. Contribution limits for most types of accounts are going up next year, which means you can pump more money into your retirement savings. The higher limits apply to 401(k) and 403(b) accounts, most 457 plans, and the federal government’s Thrift Savings Plan (TSP), according to an early November announcement from the Internal Revenue Service.
Just how much more can super savers add to their plans? The answer depends on your age, because the IRS expanded catch-up contributions for workers who are at least 50 years old, too. Here’s what you can expect your retirement contribution limits to look like in 2020:
The New 2020 Contribution Limits
- 401(k) contribution limits will increase from $19,000 in 2019 to $19,500 in 2020.
- The 401(k) catch-up contribution limit for workers 50 and older rises from $6,000 to $6,500 — so, in total, those 50 and up can contribute up to $26,000 to their 401(k)s.
- 403(b) contribution limits will grow from $19,000 to $19,500, as well.
- The 403(b) catch-up contribution limit for people 50 and older rises from $6,000 to $6,500 — so, just like with 401(k)s, those 50 and up can contribute up to $26,000 to their 403(b) plans.
- Most 457(b) plans will have increased contribution limits as well, according to the IRS announcement. They will rise from $19,000 to $19,500 in 2020.
- Catch-up contributions for most 457(b) plans will rise from $6,000 to $6,500 for people 50 and older. For more details on 457(b) plan contributions, see this IRS publication.
- The federal government’s Thrift Savings Plan will have increased limits in 2020, too: up from $19,000 to $19,500.
- Catch-up contribution limits for workers 50 and older will rise from $6,000 to $6,500 for the federal government’s Thrift Savings Plan.
- Finally, the limits on SIMPLE retirement accounts for 2020 increase to $13,500, up from $13,000 for 2019.
The Same Old Limits on IRA Contributions, with One Caveat
But what about contribution limits for Individual Retirement Accounts (IRAs)? Unfortunately, the announced increases from the IRS don’t apply to IRAs. The annual contribution limits for Traditional IRAs and Roth IRAs remain at $6,000 for 2020. If you’re 50 or over, your catch-up contribution is still $1,000, and it isn’t subject to an annual cost-of-living-adjustment.
There is a little good news for those looking to contribute to Roth IRA in 2020, however: The income phase-out ranges to qualify for making a contribution for most people are being bumped up:
- The new phase-out income range for Roth IRA contributions will be $124,000-$139,000 for singles and heads of household, up from $122,000-$137,000 in 2019.
- For married couples filing jointly, the income phase-out range will be $196,000-$206,000, up from $193,000-$203,000 in 2019.
- The phase-out range for a married individual filing a separate return, however, remains unchanged at $0-$10,000.
How Big Should Your Nest Egg Be?
It isn’t an easy question to answer, but the simplest approach is to base your retirement savings goal on how much income you’ll need to generate once you quit working.
Since most people spend less in retirement than during their careers, a 75% income replacement rate is a good place to start when calculating your savings goals. In this scenario, if you are currently earning $100,000, you’ll need about $75,000 a year to live on in retirement. Next, consider that the average monthly Social Security benefit is $1,358, according to the Social Security Administration. That works out to about $16,300 per year, meaning you’ll need about $58,700 of income from other sources to get to a retirement income of $75,000 per year.
You can work backwards from there to determine how big of a nest egg you’d need to generate $58,700 in income per year. Based on a 4% initial withdrawal rate, your savings goal for retirement would be $1.47 million. That number may sound formidable, but you’ll quickly realize the positive effects of compound interest once you start saving for retirement.
If you want to make the most of your retirement savings, consider these tips:
- If your employer offers matching contributions, invest at least that much to cash in on free money.
- Max out your contributions every year that you’re able to.
- Increase your savings to take advantage of catch-up contributions once you turn 50.
- Automate your retirement savings to grow your nest egg consistently.
- Use tax-advantaged and taxable retirement accounts to get compounding returns.
- Have a plan to make your money last when you start withdrawing it in retirement.
Be Confident About Your Retirement
There’s no one right amount of retirement savings that works for everyone. What works for you now might not be your best plan in 10 years because your situation can change over time. Make a plan to assess your spending needs and modify your retirement contributions to match your new savings target.
The increased contribution limits are welcome news. When you retire, it’s unlikely that Social Security benefits alone will be enough to sustain your lifestyle. If you add an extra $500 to $1,000 to your retirement savings each year, you increase your chances of living comfortably in your golden years.
The new limits go into effect on Jan. 1, 2020, so plan now to maximize your retirement contributions.
Marguerita M. Cheng is the Chief Executive Officer at Blue Ocean Global Wealth. She is a CFP® professional, a Chartered Retirement Planning Counselor℠ and a Retirement Income Certified Professional. She helps educate the public, policymakers and media about the benefits of competent, ethical financial planning.
Stock Market Today: Stocks Give Back GDP Gains After Beige Book
The latest GDP report showed the U.S. economy grew at a rapid-fire rate in the third quarter, but the Fed's Beige Book sparked concerns.
By Karee Venema Published
How Charlie Munger Helped Create Berkshire Hathaway, and Warren Buffett
Munger's passing reminds us that Berkshire Hathaway is much more than the value of its stock holdings.
By Dan Burrows Published
Retirement Planning in a Time of Inflation and High Interest Rates
Today’s challenges make retirement planning even more complicated than usual, but it’s not all doom and gloom.
By Ken Moraif, MBA, CFP®, CRPC® Published
Not Confident About Retirement Despite Financial Success?
You’re not alone. Uncertainty related to interest rates, government debt, long-term care and market volatility is making everyone uneasy. What can you do about it?
By Barry H. Spencer, Registered Investment Adviser Published
From Breadwinner to Retiree: How to Manage the Transition
Many people arrive at retirement with mixed emotions, including anxiety. Making the transition involves a profound shift in your mindset.
By Erin Wood, CFP®, CRPC®, FBSⓇ Published
Three Ways to Protect Your Retirement From Sequence of Returns Risk
Retiring in a down market doesn’t have to ravage your retirement, but safeguarding your savings requires planning well in advance.
By David McGill Published
Single-Premium Insurance: A Different Way to Pay for Coverage
Single-premium programs enable you to pay future annual premiums on an existing or new policy by purchasing a single-premium immediate annuity (SPIA).
By Stefan Greenberg, CFP®, CFS, CLTC Published
Four Reasons to Rent When You Downsize for Retirement
Renting is great when you want to test-drive a location, or you want more predictable costs. It might be easier for family relationships in the long run, too.
By Evan T. Beach, CFP®, AWMA® Published
A Plateful of Financial Topics That Might Come up Over Turkey Dinner
From higher prices and mortgage rates to AI planning our retirements: These are some of the conversations you might have as multiple generations gather for the holiday.
By Jerry Golden, Investment Adviser Representative Published
Four Tips for Discussing Your Estate Plans at the Holidays
Family gatherings are the perfect time to talk with family members about representing you in your estate plan and to let them know what the expectations would be.
By Allison L. Lee, Esq. Published