You may already know that the IRS and the Social Security Administration update various guidelines each year.
Here’s a round-up of the most important changes that are coming next year.
Retirement Plan Maximums
The maximum 401(k) contribution in 2020 will be $19,500 for workers who are younger than 50.
Those who will be age 50 or older in 2020 may contribute an extra $6,500 as a “catch-up.”
The contribution limit for traditional IRAs in 2020 is unchanged from 2019.
If you’re under age 50, you may contribute up to $6,000. If you’ll be 50 or older in 2020, you may make an additional $1,000 “catch-up” contribution to your IRA.
What if I’m eligible to contribute to a 401(k) plan through my job?
If you’re single and expect to earn more than $75,000 in 2020 (or you’re married filing jointly and expect to earn more than $124,000), you won’t be able to claim a tax deduction for traditional IRA contributions in 2020. But you’ll still enjoy the tax-deferred growth in your IRA.
And don’t forget that there’s an earnings phase-out for the deduction. These phase-outs are based on modified adjusted gross income (MAGI). For individuals, it’s more than $65,000; for couples, it’s more than $104,000.
Finally, if only one half of a married couple is eligible to contribute to a 401(k) plan through their job, the IRA tax deduction will be phased out if their joint income is between $196,000 and $206,000 in 2020.
Like the traditional IRA, the Roth IRA contribution maximum in 2020 will remain unchanged. If you’re under age 50, the limit will be $6,000. If you’re 50 or older in 2020, you can contribute an additional $1,000 as a catch-up.
The Roth IRA income limit in 2020 for individuals will be $139,000. For couples, it will be $206,000.
There’s also a phase-out for Roth contributions that is based on MAGI. If you’re single or head of household, the phaseout begins at a MAGI of $124,000. If you’re married filing jointly, the phaseout begins at a MAGI of $196,000.
Changes to Social Security Benefits
There are a number of changes coming in 2020 to Social Security benefits.
- The 2020 cost-of-living adjustment (COLA) for Social Security benefits will be 1.6%. That translates to a “raise” of about $24 for the average retiree.
- The full retirement age (FRA) will increase by two months to 66 years and eight months.
- The maximum monthly benefit at full retirement age will increase by $150 per month to $3,000.
- The Social Security wage base will increase by $4,800 to $137,700.
- The retirement earnings cap for filers who started taking benefits before FRA will be $18,240 in 2020. If you reach FRA in 2020, you may earn up to $48,6000 before the Social Security Administration (SSA) would withhold a portion of your monthly benefit.As always, once you’ve hit FRA (even if you began taking benefits early) there is no cap on earnings, and any benefits that the SSA withheld in prior years will be added to your monthly benefit amount.
Are you ready for these changes? Hopefully you are! If your retirement savings strategy for 2020 is already plotted, you can get a free second opinion of it from our financial advisors. Click here to set up a no-obligation meeting with one of them today.