What is the maximum 401(k) contribution?
What is the maximum 401(k) contribution? Knowing the 401(k) contribution limit is the first step to maximizing your employees' save smarter in 2020.
What is the maximum 401(k) contribution? It’s a question heard at benefits meetings, in manager’s offices, and at water coolers across the United States. And for good reason. That’s because knowing the 401(k) contribution limit is the first step to maximizing your retirement savings.
This just in: IRS announces new contribution limits
Every year, the IRS updates the rules governing 401(k) and IRA contributions, and they recently announced the guidelines for 2020. This is the perfect opportunity to share the new rules with your employees and encourage them to review their retirement contributions.
You may be asking yourself: Okay, what is the maximum 401(k) contribution for 2020? Here’s the short answer:
- For 2020, the contribution limit for employer-sponsored 401(k) plans is $19,500 for individuals under age 50.
- Contribution limits for IRAs remain at $6,000 in 2020 for individuals under age 50.
- Although there are no income limits to contribute to Roth 401(k)s, the income phase-out ranges for taxpayers making contributions to a Roth IRA have increased to $139,000 for individuals filing single, and $203,000 for married couples filing jointly.
Now, let’s get into the details. In this article, we’ll discuss the new 2020 limits and rules—and how they may impact your employees’ retirement goals.
What you need to know about retirement plans (and their contribution rules)
As you may know, there are two primary retirement plans: employer-sponsored retirement plans and IRAs. Here’s how they differ:
- Employer-sponsored plans—like 401(k), 403(b), and 457 plans—are only available if the employer offers one. If they’re eligible, individuals can contribute to both an employer-sponsored plan and an IRA.
- IRAs are tax-deferred or tax-advantaged retirement accounts that individuals (who qualify) can open up on their own—regardless of their employment situation.
Because the IRS offers tax advantages to people who participate in these plans, there are naturally a few strings attached. Specifically, individuals can only contribute a certain amount of money in a given year—and that amount decreases if they earn above a certain threshold.
Your employees deserve more than just a “good enough” retirement plan. Give them the Betterment 401(k).
Good news! Most people can contribute more in 2020.
When your employees ask “what is the 401(k) limit for 2020?” you’ll be able to share the good news that most people can contribute up to $19,500 in 2020. We’ve outlined the major changes in the limits for 2020 below, and you can also read the full IRS announcement.
When you look at the following contribution limits, you’ll notice that some of them take into consideration taxable income, which impacts how much highly compensated employees and low-income earners can save. Estimating taxable income can be complicated, and since Betterment is not a tax advisor, we suggest talking with a qualified tax professional.
Let’s take a closer look at the 2020 contribution limits.
- Employer-sponsored Plan Contribution Limits
In 2020, the limit on annual contributions to Roth or Traditional 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plans increases to $19,500. The additional catch-up contribution limit increases to $6,500 for a total contribution limit of $26,000 for employees 50 years old and older.
- IRA Contribution Limits
In 2020, the limit on annual contributions to an IRA remains at $6,000. The additional catch-up contribution limit for individuals 50 years old and over remains at $1,000. The total contribution limit is $7,000 for employees 50 years old and older.
Retirement Account Contribution Limits
|Contribution Limits||Catch-up Contribution Limit
(for individuals age 50 and above)
Want to help your employees make the most of their retirement savings vehicles as they head into the home stretch? Let them know that if they’re age 50 or older at the end of the calendar year, they can make a $6,000 catch-up contribution to their employer-sponsored plan and an additional $1,000 contribution to their IRA in 2019. For more information please see additional details from the IRS on catch-up contributions.
- Income Limits for Deductible Traditional IRA Contributions
One of the best benefits of a Traditional IRA is that you can deduct contributions on your tax return. However, Traditional IRA contributions are only deductible if an individual’s modified adjusted gross income (MAGI) falls below a certain threshold. Above that threshold, there’s a “phase-out” range in which an individual is eligible for a partial deduction, and after that range, contributions are not deductible. The phase-out ranges are also dependent on whether individuals (or their spouses) are covered by an employer-sponsored plan.
Traditional IRA Deductibility Limits for Individuals with an Employer-sponsored Plan
|Filing Status||Income (MAGI)||Income (MAGI)||Deduction Limit|
|Single individuals||≤ $64,000||≤ $65,000||Full deduction up to the
|$64,000 – $74,000||$65,000 – $75,000||Partial deduction|
|≥ $74,000||≥ $75,000||No deduction|
|Married, filing jointly||≤ $103,000||≤ $104,000||Full deduction up to the
|$103,000 – $123,000||$104,000 – $124,000||Partial deduction|
|≥ $123,000||≥ $124,000||No deduction|
Traditional IRA Deductibility Limits for Individuals without an Employer-sponsored Plan
|Filing Status||Income (MAGI)||Income (MAGI)||Deduction Limit|
|Single individuals||All incomes||All incomes||Full deduction up
to the contribution
|Married, filing jointly + neither individual or spouse has an employer-sponsored plan||All incomes||All incomes||Full deduction up
to the contribution
|Married, filing jointly + spouse has an employer-sponsored plan||≤ $193,000||≤ $196,000||Full deduction up
to the contribution
|$193,000 – $203,000||$196,000 – $206,000||Partial deduction|
|≥ $203,000||≥ $206,000||No deduction|
To read more about the IRA deduction limits, refer to details available from the IRS.
- Income Limits for Roth IRA Contributions
Because a Roth IRA is funded with after-tax dollars, qualifying withdrawals (typically in retirement) can be made on a tax-free basis. However, to make the maximum $6,000 Roth IRA contribution, an individual’s income must fall below a certain threshold.
In 2020, eligibility to contribute to a Roth IRA starts to phase out at $124,000 for single filers and $196,000 for married couples (filing jointly). That’s a higher start of the phase out threshold than in 2019, which began at $122,000 for single individuals and $193,000 for married couples.
Income Ranges for Partial Roth IRA Eligibility
Individuals whose incomes fall within the following ranges are limited to making partial Roth IRA contributions. Those whose incomes fall below these ranges can contribute the full amount. Individuals with incomes above the range cannot contribute to a Roth IRA that year.
|Income Tax Filing Status||2019 MAGI||2020 MAGI|
|Single||$122,000 – $137,000||$124,000 – $139,000|
|Married Filing Jointly||$193,000 – $203,000||$196,000 – $206,000|
For more information and guidance regarding Roth IRAs, review the expanded IRS rules.
- Income Limits for the Retirement Savings Contributions Credit (Saver’s Credit)
To help low-income people save for retirement, the IRS offers the “Saver’s Credit.” Individuals may be eligible for the credit if they’re saving for retirement and their income falls below specific ranges. This credit offsets the individual’s income-tax liability; however, it phases out as the individual’s adjusted gross income (AGI) increases.
In 2020, AGI limit for the Retirement Savings Contribution Credit increases to:
- $32,500 for married individuals filing separately
- $48,750 for heads of household
- $65,000 for married couples filing jointly
The maximum credit is available to those who have an AGI below or at the bottom of the ranges shown in the table below.
Saver’s Credit Income Limits
|Tax Filing Status||2019 AGI||2020 AGI|
|Single||$19,250 – $32,000||$19,500 – $32,500|
|Married Filing Jointly||$38,500 – $64,000||$39,000– $65,000|
For more information, refer to the IRS page regarding the Saver’s Credit.
Are your employees wondering how much to save? Betterment can help.
Whenever contribution rules change, we update Betterment’s advice. When employees log in to Betterment, they can get personalized advice on how to save for retirement. In fact, we prioritize which accounts are smart to invest in first, and then what to max out next. And our advice is always consistent with current contribution rules, however, they may change.
In addition, Betterment can take into account outside holdings, such as prior employer-sponsored plans. That way, employees get a more holistic look at their total retirement savings.
To help your employees maximize their retirement plans, encourage them to leverage Betterment’s personalized guidance technology, and if you aren’t already partnering with us, learn more about the Betterment for Business 401(k) now.
Want to attract better employees? Get a better 401(k).
A strong 401(k) plan is a compelling way to show your employees that they’re valued—and recruit top talent. In our recent survey of 845 Betterment for Business plan participants, we discovered that the 401(k) remains one of the most highly regarded employee benefits:
- 67% said that a good 401(k) was a very important or important factor when evaluating a job offer
- 46% said an employer match impacted their decision to accept a job
However, 30% of respondents said details of the 401(k) never came up during the job search at all, implying that some employers are missing an opportunity to promote their benefits to their full advantage.
In addition, a valuable employer match or profit sharing contribution is a key driver of retirement contributions. In fact, the survey revealed that 78% of people who have matching contributions save enough to receive the full employer match. The inverse is also true: 10% of people who do not participate in their company’s 401(k) plan report that it is because the company does not match their contributions.
In the war for top talent, it’s not enough to offer a 401(k) plan. To compete (and win) you must provide a better 401(k) plan that features trusted advice, easy access to account status, and transparent, low fees.
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