2020 Changes to 401k, SEP and IRA Contribution Limits

How much money can you save for your retirement in 2020? The I.R.S. just increased the annual contribution limits on IRAs, 401(k)s, and other widely used retirement plan accounts for 2020, so we thought it would be a good idea to offer a quick look at some notable changes that you should know for 2020. In 2018, 13% of employees with retirement plans at work saved the maximum amount of $18,500-$24,500. 15% of the employees that were offered the catch-up plan over the age of 50 took advantage of that offer. The announcement by the I.R.S. means that the numbers listed can go up, and if you value your retirement, you should be a part of it!  

Contribution Limit Changes In 2020

    In any type of IRA in 2020, you can put up to $6,000 for your retirement. If you are older than 50 years old anytime in 2020, the limit has been increased to $7,000. Employees that participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan will face a $500 increase in the limit of contributions. In 2019, the contribution limit was $19,000, in 2020, there was a boost to $19,500. The catch-up contribution limit for participating employees over 50 years also increased by $500, from $6,000 to $6,500. (This is the first increase in the contribution limits since 2015 when the limit rose to $6,000.) 

SEP IRAs and Solo 401(k)s

Are you self-employed, or do you own a small business? You may have a SEP IRA or a solo 401(k), which allows you to make both an employer and employee contribution. The limit on total SEP IRA and solo 401(k) contributions rises $1,000 in 2020, reaching $57,000. This amount is based on how much employers can contribute as a percentage of their employee’s salary. The compensation limit that is used in the savings calculation also increases in 2020 by $500. In 2019, the limit was $280,000, in 2020 however, the limit boosts to $285,000. 

SIMPLE IRA Limit Changes In 2020

    If you have a SIMPLE retirement account, also known as the Savings Incentive Match Plan for Employees Individual Retirement Account, limitations also have a $500 boost from 2019’s $13,000 to $13,500. But the SIMPLE catch-up plan is still the same as the 2019 limit of $3,000. 

Changes in Phase-Out Ranges in 2020

Are you a single taxpayer covered by a workplace retirement plan? Your phase-out range is $65,000 to $75,000, an increase from $64,000 to $74,000.

Are you married, filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan? Your phase-out range is $104,000 to $124,000. That’s an increase from past years of $103,000 to $123,000. 

If you are a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

If you are an IRA contributor that is not covered by a workplace retirement place and is married to someone who is covered by one, the deduction is phased out if the couple’s income is between $196,000 and $206,000, an increase from $193,000 and $203,000.

For taxpayers making contributions to a Roth IRA’s income phase-out is $124,000 to $139,000 for singles and heads of households. That’s an increase from $122,000 to $137,000. 

If you are a married couple filing jointly, the income phase-out range is $196,000 to $206,000, an increase from $193,000 to $203,000.

What Should I Do Now?   

Planning for your retirement can be a daunting task, and you may still have some remaining questions. The Law Offices of Joel A Harris are more than prepared to provide you with legal counsel pertaining to your planning, execution, or, and any other legal concerns or questions you may have. The Law Offices of Joel A Harris, located in Concord, Walnut Creek, and Antioch are available to help you to the best of their abilities. Joel Harris is an attorney with 30 years of experience and is extremely familiar with this process. If you are not sure how to begin, or you just want some help navigating the ins and outs of protecting your retirement and estate, feel free to visit us online, in person or call us by phone at (925) 757-4605. 

Sources

  1. irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits 
  2. irs.gov/newsroom/401k-contribution-limit-increases-to-19500-for-2020-catch-up-limit-rises-to-6500 
  3. forbes.com/sites/ashleaebeling/2019/11/06/irs-announces-higher-2020-retirement-plan-contribution-limits-for-401ks-and-more/
  4. cnbc.com/2019/06/03/these-are-the-new-hsa-limits-for-2020.html  

Five Major Takeaways From The SECURE Act You Need to Know for Estate Planning

Saving for retirement is a task that unfortunately we Americans have become worse and worse at over the years. Over half of the American population has not saved enough for retirement at the time of retirement and end up having to return to work with at least a part-time job. A full 25% of Americans don’t have any retirement savings or plans in place at any given time in their working careers. However, a law that was just signed into law by Congress on December 20, 2019, aims to improve and aid in Americans preparing and saving for retirement. The bill, called The Setting Every Community Up for Retirement Enhancement (SECURE) Act, has five major key takeaways that affect estate planning:

  • Part-time employees will now be qualified for retirement plans under their employers.
  • Small business owners will now be able to set up 401(k) accounts for their employees. 
  • 401(K) statements will now need to disclose potential monthly payments to the recipient on every balance statement 
  • The age at which you need to begin withdrawing money from retirement savings accounts has been shifted to 72 years, instead of 70.5 years. 
  • IRA distributions have been drastically altered.

How Are Part-Time Employees Affected?

 Under the SECURE Act, part-time employees who work at least 500 hours a year and have been with the institution for 3 years or more will now not be exempted from contribution plans from the employer. This will have a huge impact on those who have moved from full-time employment to part-time, instead of fully retiring. This will have a major impact on those who are 65 and above, who, in the last decade or so, have been forced to continue working in some capacity because their retirement accounts cannot support them fully. 

How Are Small Business Owners Affected?

The next large take-away from the SECURE Act is that now small businesses will be able to offer retirement plans for their employees. Previously, it was costly for small businesses to offer these kinds of options to their staff members, leaving employees to plan for themselves. Now, it will increase the cap of the income that employees need to be able to save from 10% of income to 15% of their income. This adjustment is important for those who have spent their lives in small businesses, and have been left to their own devices in terms of retirement planning. This aims to assist them in making their retirement planning more feasible.

How is My 401K Affected by the SECURE Act?

 Another significant part of the SECURE Act is the transparency it will require from 401(K) accounts. As of right now, 401(K) accounts are not required to disclose the monthly allowance the retiree would be receiving on each statement. While this might seem trivial, the sum of money saved has been allowing Americans to become falsely secure in the amount they are saving, without having a real concept of what that sum will translate into. Now, 401(K) accounts will be required to display the monthly allowance on every balance, for the retiree to better understand exactly the sums they will be receiving when they do retire. 

How Does the SECURE Act Affect Our Retirement Age?

Finally, the SECURE Act adjusts the age at which people need to begin withdrawing money from 70.5 years to 72 years of age. While this is a subtle change, since the majority of people are working into more advanced years anyways, those who do not need to withdraw money will have an additional 1.5 years to keep that money in their retirement accounts. Withdrawals from the retirement accounts are still allowed before then, but this increase in age is aimed at helping those who are continuing to work anyways, by allowing them more time to save.

How Does the SECURE Act Affect An IRA?

Trusts should no longer be beneficiaries of most IRA’s under the SECURE Act.  Previously if your living trust was written properly your trust could be the benefit of your IRA so that your trustee could maintain some control over your beneficiaries.  Now with the SECURE Act, if your trust is named one of the beneficiaries, the beneficiaries of the trust will probably have to take distribution of the entire IRA in the 10th year after death, which will result in a larger tax burden. Finally, if your IRA beneficiary is very young or disabled, you will want to consider a “trusteed IRA” which allows a professional to manage the IRA after your death.

How Does the SECURE Act Affect My Inherited IRA?

You will have to pay taxes on inherited IRAs sooner than you may have expected. The SECURE Act essentially eliminates the “stretch IRA,” which was an estate planning method that allowed IRA beneficiaries to stretch their distributions from their inherited account — and the required tax payments on them — based on their life expectancy. For example, if you named a grandchild as your beneficiary, most of your account could’ve stayed invested for decades after your passing, and the grandchild could’ve continued to take advantage of the tax benefits. Under the new law, however, most beneficiaries must now withdraw all the distributions from their inherited account and pay taxes on it within 10 years. The exceptions to this are for spouses and the chronically ill or disabled. One important thing to remember is that this provision is not retroactive and will not affect those who have already inherited an IRA. It will apply to those starting on Jan. 1, 2020, and may affect the estate planning of those planning to pass on an IRA to a non-spouse.

What Should I Do If My Living Trust Is Named As Beneficiary Of My IRA?

Under the SECURE Act, if your living trust is named as beneficiary of your IRA, your beneficiaries will probably only have two options, both bad: cash it all out immediately, or cash it all out in year 10.  This may cause a huge tax.  There are other options available, but these need to be explored on a case by case basis.  For most people, you simply need to name your spouse as primary IRA beneficiary, and your children as contingent IRA beneficiaries.  However, if your children are young, disabled or foolish, other options will need to be explored.  For example, you may be able to name a trust company or fiduciary as trustee of your IRA.  You can also explore ROTH IRA conversions with your tax and financial advisor.  More complex but powerful options may also be available.

What Should I Do Now?   

With these new changes in retirement planning, you may still have some remaining questions. The Law Offices of Joel A Harris are more than prepared to provide you with legal counsel pertaining to your retirement, establishing a trust to protect your legacy and your assets, and any other legal questions you may have. Whether it is in retirement planning or any other kind of legal counsel, The Law Offices of Joel A Harris, located in Concord, Walnut Creek, and Antioch are available to help you to the best of their abilities. Joel Harris is an attorney with over 25 years of experience and is extremely familiar with this process. If you are not sure how to begin, or you just want some help navigating the legal side of your retirement process, feel free to visit us online, in person or call us by phone at (925) 757-4605.

Sources