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. You don’t have to wait for the official numbers to plan for your retirement savings in 2020. You can get a head start on your retirement planning with our 401(k) contribution limits projections.
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 predicts a slight increase in 401(k) contribution limits for 2020.
Mercer did not publish predictions for employer contributions, but some well-regarded finance bloggers are predicting an increase from $56,000 to $57,000 for total contributions. They predicted contribution limits will probably also apply to other retirement savings plans, including 403(b), many 457 plans and Thrift Savings Plans.
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, so the IRS is expected to announce official 2020 contribution rules in late October or early November.
There are three separate limits each year:
Another critical thing to know about IRA contribution limits is that your contribution can get phased out altogether if you are a highly-compensated employee. The IRS sets limits for the maximum allowable income to be eligible to make 401(k) contributions. These limits also apply to other tax-deferred retirement accounts.
The IRS calculates the maximum allowable income as five times the maximum total contributions limit. For example, in 2019, the ceiling was an annual salary of $280,000 or more. With a projected 2020 401(k) total contribution of $57,000, the expected maximum salary for eligibility is $285,000.
The chart below shows contribution limits for the past several years, with projected limits for 2020.
|401(k) Contribution Limits by Year|
|Year||Employee Contribution Limit||Total Limit||Catch-up Contribution Limit|
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.
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.