On November 6, 2019, the IRS announced the 401(k) and IRA contribution limits for 2020. The IRA limit remains at $6,000 in 2020. Individuals over age 50 may make a catch-up contribution of $1,000, for a total transfer of $7,000 in 2020.
Traditional IRA contributions from pre-tax income are tax deductible. The traditional IRA has two main tax benefits – contributions are tax deductible and grow tax free. If you are covered by a qualified retirement plan at your workplace, the IRA deduction may be reduced or phased out.
- Single Taxpayers with Workplace Plan – IRA contributions for single taxpayers are phased out for individuals with incomes from $65,000 to $75,000.
- Married Couple with Workplace Plan – Married taxpayers with joint income of $104,000 - $124,000 will experience the IRA phaseout.
- Married and No Workplace Plan – If one spouse has no workplace plan and the other spouse is covered by his or her workplace plan, the phaseout on a joint return is $196,000 to $206,000.
A Roth IRA is funded with after-tax income. It grows tax free and most distributions are tax free. Roth IRA owners may withdraw contributions tax-free at any time. After the Roth IRA has been in existence for five years and the owner is over age 59½, amounts may be withdrawn tax free.
The Roth IRA phaseout limits also increase in 2020.
- Single Individuals – The Roth phaseout for single taxpayers next year will be $124,000 to $139,000.
- Married Couples – For married couples, the Roth IRA phaseout is $196,000 to $206,000.
Many businesses maintain a 401(k) plan and most nonprofits provide a 403(b) plan. The limit for an employee contribution to a 401(k) or 403(b) plan increases to $19,500 in 2020. Employees over age 50 may make an additional catch-up contribution of $6,500, for a total transfer limit of $26,000.
If your employer offers both a traditional 401(k) and a Roth 401(k) plan, you may allocate your employee contribution to one or both funds. The traditional 401(k) amounts are tax deductible, but the Roth 401(k) contributions are after-tax.
Some employers choose to match the employees' 401(k) contributions. This is a good way to encourage employee participation in the 401(k) plan. The employer match is used to fund the employee’s traditional 401(k) account. The employee may still make contributions to a Roth or traditional 401(k) account up to the $19,500 or $26,000 limit.