Good news for 401(k) retirement savers. The IRS increased the contribution and tax-deferral limits for 401(k) plans for 2020. Employees can now contribute up to $19,500 per year starting in 2020 – a $500 increase. Those over 50 years of age received an added increase. Those 50 or more may now make additional catch-up contributions of $6,500 per year in 2020 (or $26,000 per year in total) to their 401(k) accounts.
And if you receive company matching contributions or profit sharing, the all-in tax-deferral limit has been increased from $56,000 to $57,000 for 2020 with those over 50 years able to put in $63,500 with the catch-up. Here are the key 2020 401(k) changes to know as compared to 2019:
| 401(k) Limit Increases for 2020 | ||
|---|---|---|
| 2020 | 2019 | |
| Employee contribution limit | $19,500 | $19,000 |
| Annual limit per individual | $57,000 | $56,000 |
| Age 50+ catch-up amount | $6,500 | $6,000 |
| Annual compensation limit | $285,000 | $280,000 |
| Highly compensated employees | $130,000 | $125,000 |
401(k) Saving Advantages Over Traditional IRAs Is Growing
The tax advantages for 401(k) savers versus those opting to use IRAs or don't have access to a 401(k) plan is large and is now even a bit bigger. Note that IRS contribution limits remained unchanged from 2020.
| 401(k) Advantages Over Traditional IRAs in 2020 | ||
|---|---|---|
| 401(k) | IRA | |
| Annual limit per individual | $51,000 (employee + employer contributions) |
$6,000 |
| Age 50+ catch-up amount | $6,500 | $1,000 |
| Roth income limit | None | $139K* |
| Penalty-free access, if needed | Yes, via a loan | No |
*Beginning at $124K, the amount you are allowed to contribute begins to decrease, hitting $0 at $139K for singles (ranges is $196K to $206K for married couples filing joinly)
Refer to IRS cost-of-living adjustment for 2020 in Notice 2019-59 (PDF) for more.