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2020 Contribution Limit Changes & the Secure Act

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Understanding the Changes for 2020 So You Can Maximize Your Retirement

With the new year comes some new changes to retirement plans starting January 1, 2020. Between the Internal Revenue Service announcing cost-of-living adjustments for tax year 2020 and the new Secure Act, there is a lot to digest.

Here are the highlights:

IRS Cost-of-Living Adjustments

Detailed in Notice 2019-59 and posted on IRS.gov, the IRS is increasing the contribution limits to 401(k) and other retirement plans starting January 1, 2020, including:

  • Maximum employee contributions for 401(k), 403(b), and 457(b) plans increases from $19,000 to $19,500

  • The catch-up contribution limit for employees aged 50 and over who participate in these plans is increased from $6,000 to $6,500

  • Combined maximum employer and employee contribution increases from $56,000 to $57,000

  • Annual compensation limit for calculating contributions increases from $280,000 to $285,000

  • Highly Compensated Employee limit increases to $130,000

  • The maximum employee contribution limit for SIMPLE retirement accounts increases from $13,000 to $13,500

  • Contribution amounts for traditional and Roth IRA's remain unchanged at $6,000 for 2020

  • Likewise, additional IRA catch-up contribution limits for those aged 50 and over remains unchanged at $1,000

The Secure Act

The Setting Every Community Up for Retirement Enhancement Act of 2019 – the SECURE Act – was passed through the House of Representatives and the Senate, and then signed by President Trump shortly before Christmas.

Incorporated into a broader 2020 fiscal year appropriations bill, the SECURE Act is aimed at helping Americans more easily participate in tax-advantaged retirement accounts as well as helping ensure that older retirees do not outlive their assets.

While the SECURE Act contains 29 provisions aimed at helping Americans better save for retirement, here are a few highlights:

  • It offers tax incentives for small businesses to set up automatic enrollment in retirement plans

  • It allows employers to join with other companies and offer joint-retirement plans, which may help keep costs down

  • It allows many part-time workers to participate in employer-sponsored retirement plans

  • It creates a new early withdrawal penalty-tax exemption of up to $5,000 from an IRA to use for childcare costs

  • It pushes back the Required Minimum Distribution Age from 70 ½ to 72

  • It allows for the inclusion of more lifetime-income options, including annuities

Start Planning Your 2020 Changes Now

The changes from the IRS and the new SECURE Act both alter the rules surrounding retirement plans. While many of them are simple, others are very complex. As such, investors should study the details and potential implications before blindly adopting.

Please reach out to discuss your particular situation.