How much can you save in a 401(k) in 2020? We researched contribution limits for 2020 401(k) plans, so you can start planning your retirement savings for the coming year. The IRS sets limits on how much money you can put into a 401(k) retirement account annually and announces contribution limits late each fall.
How the IRS Calculates 401(k) Contribution Limits for 2020
Contribution limits are calculated using the IRS’s cost-of-living adjustment and the Bureau of Labor Statistics’ Consumer Price Index for All Urban Consumers (CPI-U). These figures include third-quarter CPI-U, and the IRS announced the official 2020 contribution rules early in November 2019.
There are three separate limits each year:
- Employee contribution limit: This is the contribution limit for an individual per calendar year. You can save up to this amount in your 401(k) in a given year. Contributions come out of payroll wages, and these pre-tax deductions reduce your taxable income.
- Total contribution limit: Many employers provide matched contributions to 401(k) savings as a benefit. Employer limits are much higher than individual limits, so it pays to work for a company that contributes to your 401(k). The total contribution is the employee contribution plus the employer match. This formula doesn’t include any catch-up contributions if you’re over 50.
- Annual income restriction: The total contribution limit can’t exceed your annual income. So, if the annual limit is $57,000 and you make $50,000, your total contribution limit will be $50,000.
- Catch-up limit: Since 2001, the IRS has allowed additional contributions for older Americans to help prepare for retirement. If you are age 50 or older by the end of the calendar year, you are allowed to contribute additional money toward your 401(k) each year. Even if your 50th birthday falls on December 31, you can still make catch-up contributions up to that year’s limit. Add the catch-up limit to employee and employer contribution limits, and you can add thousands of dollars to boost your 401(k) balance before you retire.
2020 401(k) Contribution Limits
The IRS calculates maximum 401(k) contribution amounts based on annual inflation and cost of living. Management consulting firm Mercer is known for making annual contribution limit projections. The firm considers historical limits and current economic conditions. Mercer predicted correctly, with a slight increase in 401(k) contribution limits for 2020.
- An increase from $19,000 to $19,500 for employee contributions
- An increase from $6,000 to $6,500 for catch-up contributions
If your employer has a 401(k) matching plan, the limit on this benefit is $57,000 for your contributions plus the employer’s. This limit also applies to 403(b) and Thrift Savings Plans.
2020 Compensation-related Limit for 401(k)s
Another critical thing to know about 401(k) contribution limits is that your contribution is limited by your income. The total annual contributions to all accounts in plans through one employer are limited to $57,000, or your annual compensation if less than $57,000. If you make catch-up contributions, this amount increases to $63,500 for 2020.
Historic 401(k) Contribution Limits
The chart below shows contribution limits for the past several years, with limits for 2020.
| Year | Employee Contribution Limit | Total Limit | Catch-up Contribution Limit |
|---|---|---|---|
| 2020 | $19,500 | $57,000 | $6,500 |
| 2019 | $19,000 | $56,000 | $6,000 |
| 2018 | $18,500 | $55,000 | $6,000 |
| 2017 | $18,000 | $54,000 | $6,000 |
| 2016 | $18,000 | $53,000 | $6,000 |
| 2015 | $18,000 | $53,000 | $6,000 |
| 2014 | $17,500 | $52,000 | $5,500 |
| 2013 | $17,500 | $51,000 | $5,500 |
| 2012 | $17,000 | $50,000 | $5,500 |
| 2011 | $16,500 | $49,000 | $5,500 |
| 2010 | $16,500 | $49,000 | $5,500 |
* Projected Figures
When 2020 401(k) Limits Go Into Effect
Contribution periods follow the tax year calendar, which runs from January 1 to December 31 every year. With this in mind, you can make contributions up to the 2019 limit until December 31, and after that, you can contribute up to the amount of 2020 401(k) limits.
Concluding Thoughts on 401K Limits
No one can live comfortably on Social Security benefits. It pays to start preparing early to maximize your 401(k) contributions. While it is impossible to know for sure what the contribution limits will be for 2020, it’s reasonable to assume limits will increase slightly from the current year. Plan now to maximize your retirement savings in 2020.