Since personal retirement accounts were first created in the 1970s and 80s, the government has approved a broad range of these accounts, with differing contribution levels and eligibility requirements. Over the years, too, the IRS has helped to further popularize them with additional tax deductions, enhanced tax-deferred status, and more.
The IRS also makes annual cost-of-living adjustments that can affect the deductibility and limits of contribution. The changes take effect on January 1 each year.
Increased contribution limits
Perhaps the most exciting change for 2020 is the increased contributions you can make this year.
If you participate in a 401(k), 403(b), the federal government's Thrift Savings Plan, as well as most 457 plans, your maximum annual contribution increased by $500, from $19,000 to $19,500. In addition, the contribution for SIMPLE retirement accounts also increased $500 for the year, from $13,000 to $13,500. Plan participants over 50 will also get an additional boost with an annual $500 increase in catch-up contributions from $6,000 to $6,500.
Despite these increases, traditional IRA contribution levels have not changed. The annual contribution to a traditional IRA stands at $6,000, while the catch-up contribution for those 50 and over also remains unchanged at $1,000.
Increased deductible limits
Perhaps even more exciting are the increases in income levels that determine which plans you’re eligible for and how much of your contribution may be tax-deductible. The cost-of-living adjustments for 2020 now mean more people may be able to deduct contributions to a traditional IRA, to contribute to a Roth IRA, and to claim the Saver’s Credit.
While you may be able to deduct your contributions to a traditional IRA, the amount you can deduct is determined by a number of factors. And that amount could be reduced or eliminated depending on your filing status, your income, and whether you (or your spouse) work for a company with a retirement plan. If neither of you has a plan through work, you can deduct the entire contribution to your traditional IRA. You can also deduct all or part of your contribution if you are covered by a workplace plan and your income is below a certain amount. For 2020, these income levels have increased.
- Single taxpayers with a workplace retirement plan will now see their IRA contributions phase out between $65,000 and $75,000.
- A spouse with a workplace plan and is married filing jointly will now see their IRA contributions phase out if their joint income is between $104,000 and $124,000.
- A spouse with no workplace plan who is married to a taxpayer with a workplace plan will now see their IRA deduction phased out if their joint income is between $196,000 and $206,000.
- A married taxpayer filing separately and covered by a workplace plan will not receive an annual cost of living adjustment. They will see their IRA deduction phased out between $0 and $10,000.
While a Roth IRA can be a viable retirement option for many people, your eligibility to open this account, or contribute at all, is strictly determined by income.
- Single taxpayers and heads of households will see their Roth IRA contributions phased out with income between $124,000 and $139,000.
- Married couples filing jointly will see their Roth IRA contributions phased out with income between $196,000 and $206,000.
- A married individual filing separately is not subject to an annual cost-of-living adjustment, and their Roth IRA contribution will phase out when their income is between $0 and $10,000.
The Saver’s Credit (also known as the Retirement Savings Contributions Credit) is a tax credit for low- and moderate-income workers to help encourage their participation in a variety of retirement plans. For 2020, the income levels for this credit have increased to $65,000 for married couples filing jointly; $48,750 for heads of household; and $32,500 for singles and married individuals filing separately.
Now more taxpayers can save more
By helping more taxpayers to be eligible to deduct their contributions, these cost-of-living adjustments should help more taxpayers continue to save for retirement. All while continuing to provide the tax break many of us depend on. All in all, these adjustments are a great thing for anyone saving for retirement.