2020 Contribution Limit Changes & the SECURE Act
Understanding the changes for 2020 so you can maximize your retirement
There are some significant changes to your retirement plans starting January 1, 2020. Between the Internal Revenue Service announcing cost-of-living adjustments for the 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 your 401(k) and other retirement plans starting January 1, 2020, including:
Maximum employee contribution rises to $19,500
Combined employer and employee contribution rises $57,000
Employee catch-up contribution for participants ages 50+ rises to $6,500
Combined employer and employee contribution for ages 50+ rises to $63,500
Annual compensation limit for calculating contributions increases to $285,000
Highly Compensated Employee limit increases to $130,000
The compensation amount regarding simplified employee pensions remains unchanged
The limitation regarding SIMPLE retirement accounts rises to $13,500
The SECURE Act
The Setting Every Community Up for Retirement Enhancement Act of 2019 – the SECURE Act – passed through the House of Representatives and the Senate and was 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 to small businesses to set up automatic enrollment in retirement plans
It allows employers to join with other companies and offer joint-retirement plans, which should 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. And while many of them are simple, others are very complex. As such, investors should study the details and potential implications before blindly adopting them.
Talk to your financial advisor to make sure you understand the new rules and potential implications.
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