Update Your Retirement Strategy with New 2020 IRS Contribution Limits

Capitalstars Investment Advisor

If you wish you could save more for retirement, you’re in luck. The Internal Revenue Service (IRS) is letting you contribute more toward retirement in 2020. The increase in the annual limit also applies to catch-up contributions. This is great news for retirement savers since 38% of Americans aren’t confident that they will have enough money to retire, according to Pew Research Center.

The new contribution limits go into effect on January 1, 2020. The changes will affect several types of retirement plans, including 401(k), 403(b), 457 plans, and the federal government’s Thrift Savings Plan (TSP). If you’re concerned about your savings, now is the time to update your retirement strategy.

How much more you can add to your nest egg depends on your age and the type of plan you have. If you’re age 50 or over, you can take advantage of the increase in catch-up contributions. If you primarily rely on an Individual Retirement Account (IRA), your annual contribution limits will remain the same in 2020.

However, you can benefit from the changes if you have a 401(k) account or similar workplace retirement plan. Here’s what you can contribute to a 401(k), 403(b), 457 plan, and TSP in 2020:

The contribution limit is increasing from $19,000 to $19,500

Catch-up contributions for people 50 years and older will rise from $6,000 to $6,500

It might not sound like a lot, but that extra $500 can have a positive impact on your retirement savings. For instance, if you had $0 saved and contributed $19,000 toward retirement each year for 20 years, you’d end up with $698,926.23 assuming a 6% return. Increasing your annual contribution to $19,500 will give you $18,392.80 more under the same circumstances.

Since the IRS is also increasing the catch-up contribution limit by $500, you can save up to $1,000 more toward retirement if you’re age 50 or older. For those of you worried about having enough saved, these new limits can make all the difference in your quality of life during your retirement years.

Don’t be surprised if this is the first time you’re hearing about these changes. The IRS announced the new limits late in the year, and many employers and plan sponsors may have already distributed benefits materials for the 2020 open enrollment period. However, having a higher cap on the amount you can save toward retirement can make a huge impact on your savings strategy. Make sure to check with your employer and adjust your retirement savings to account for the increase.

The strategy you use for your employer-sponsored plan depends on where you work. Several types of plans are available to fund your nest egg, though a 401(k) account is the most common option. Most for-profit employers offer them as part of the employee benefits package. If your company matches a portion of the contribution you make to the plan, you should contribute at least that amount. The “free money” you get from the company in the form of matching contributions can double the size of your investment account.

You may have a 403(b) plan instead of a 401(k) if you work for a non-profit organization. Matching contributions are common among 403(b) plans, as well. Check to see if you’re saving enough to max out the employer match to take advantage of faster growth.

For government organizations, a 457 or TSP plan is the go-to retirement account option. They allow you to save for retirement on a tax-deferred basis and usually have the same contribution limits and withdrawal rules as a 401(k) or 403(b).

Even though it’s where most people begin to save for retirement, you shouldn’t rely only on an employer-sponsored plan. A traditional or Roth IRA makes a great addition to building your retirement fund. The tax benefits for IRAs are different from 401(k) and similar plans, but can still be used to your advantage.

Ultimately, your retirement savings strategy depends on your retirement goals. There are financial benefits and limitations for each type of retirement savings option. Comparing them side-by-side can help you choose which ones are right for your situation. The important thing is that you understand the contribution limits so you can make the most out of growing your nest egg.