2020 Key Figures
Have you heard the news? Not only does the New Year offer some exciting fresh start abilities, but there’s also changes to some beneficial tax saving vehicles! I’ll give you a minute to put that champagne down and pay attention, so you can maximize savings benefits for the year ahead!
Let’s start with everyone’s favorite saving vehicle—the 401(k). The under age 50 limit has gone up from $19,000 to $19,500. Additionally, there has been an increase to the 50 and over catch-up from $6,000 to $6,500. For those of you who fit that age, you can now put a total of $26,000 away before tax (or after tax if a Roth 401(k)).
Defined Benefit Figures
For 2020, the limitation for defined benefit plans has changed as well. The figure has gone from $56,000 to $57,000. Think of that as the maximum allowable that can go into any qualified retirement plan. The amounts that make up that figure are employee pre-tax or Roth contributions, employer match, profit sharing, and after-tax contributions
The annual compensation limit has increased from $280,000 to $285,000. This amount represents the maximum allowable on which your employer can match. For you high earners, generally income over that amount opens you up to any deferred compensation plans your employer may offer.
Are you considered highly compensated? In the IRS’s eyes if you now make $130,000 or more, you are considered highly compensated. For many, this won’t present a problem. If you’re in a smaller 401(k) type of plan, you might be restricted as to what you can contribute if it does not pass certain IRS testing.
IRA & Roth IRA
Drum roll please…..
There are absolutely no changes to what you can contribute to an IRA or Roth IRA plan. The reasoning? It beats me. It would seem logical to increase those limits, as well. The amounts remain at $6,000 if under 50 and $7,000 if 50 and above. They did increase the phase out for Roth IRA contributions to begin at $196,000 of AGI for married filing jointly and $124,000 of AGI for single filers.
If you’ve followed my writings for some time now, you know I think the H.S.A (health savings accounts) is one of the best planning tools around. In 2020, they get better. The limits have increased $100 for family coverage and $50 for individual coverage. This sets the new 2020 limits at $3,550 for single and $7,100 for family plan. Also, if you are 55 or older, you can still contribute an extra $1,000 per year, which is unchanged from 2019.
For those F.S.A plans (flexible savings accounts), the limit has increased from $2,700 to $2,750. There is an additional $500 that your employer can contribute above and beyond these funds. These are still good plans, just not as great as the H.S.A plans. (Just a friendly reminder that the dollars in your flexible savings account must be used by year end.)
For those among the 63 million currently collecting Social Security, there is some good news on the horizon. In 2020, there will be a COLA (cost-of-living adjustment) of 1.6%. This means your payments will increase automatically next year by that amount. So take out the fancy wine and start partying like its 1999.
Now for those of us working stiffs, there is also an increase in Social Security. However, it isn’t quite as exciting as receiving a 1.6% increase in pay. Instead, the maximum amount of earnings subject to the Social Security tax is increasing. The amount is going from $132,900 to $137,700. That means you’ll receive a 6.2% raise on income over $137,700 in 2020. Not quite sure why the cost of living increase is 1.6%, but the increase in amount taxable is 3.6%. I guess that’s why I am not smart enough to be in politics.
Hopefully these figures help you and your team of advisors appropriately plan for the New Year. Make those small adjustments; if you do it can lead to a large impact. 2019 was a year of mixed emotions for me, as every year seems to be. I’ll leave you with a thought I couldn’t get out of my head for the past few weeks.
Most of you by now know my affection for everything Bruce Springsteen-related. The other day I was watching the Clarence “Big Man” Clemons documentary “Who do I think I am” on Netflix. Of course, I loved it, as it was a lot of insight into one of the greatest saxophonists of all time. However, the thought worth sharing came at the end of the documentary. One of his lifelong friends said that he and Clarence ended each phone call the same way. They’d always say, “Order the good wine.” It was their way of remembering life is short, so don’t put off enjoying every moment along with the finer things.
That’s my wish for all of you. After another successful 52 blogs in 2019 (which can be exhausting), I want to remind all of you in 2020 to order the good wine when you have the chance. Love to all and a Happy 2020!