Jo Willetts, EA
Director, Tax Resources
Published on: May 04, 2021
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We all know how important it is to save for retirement; and many of us work hard to contribute as much as we can. The coronavirus has left many strapped for cash and you may be tempted to reduce the amount of your contribution. But if you can hold on, keep in mind that in 2020, the IRS is making it a little bit easier to save even more.
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.
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.
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.
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.
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.
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.
About the Author
Jo Willetts, Director of Tax Resources at Jackson Hewitt, has more than 25 years of experience in the tax industry. As an Enrolled Agent, Jo has attained the highest level of certification for a tax professional. She began her career at Jackson Hewitt as a Tax Pro, working her way up to General Manager of a franchise store. In her current role, Jo provides expert knowledge company-wide to ensure that tax information distributed through all Jackson Hewitt channels is current and accurate.