Photo of young family reviewing their 2020 retirement contributions limits with their financial advisor.

2020 retirement contribution limits and income ranges are up

Thanks to a cost of living adjustment made by the Internal Revenue Service (IRS), you can put away more money in retirement plans and health savings accounts (HSAs) in 2020. Good news if you’re proactive about retirement savings or want to up your savings game this year. 

Let's break down what the changes can mean for your retirement plans, whether you’re already saving or just getting started.

2020 401(k) limits (and other employer-sponsored plans)

Starting in tax year 2020, contribution limits increase from $19,000 to $19,500 for certain types of retirement accounts including:

Some retirement plans have set a lower limit, so check the details of your own employer’s plan.

Individual retirement account (IRA) contribution limits remain at $6,000.

Boosting your retirement savings with new limits

A $500 increase in retirement contributions may not seem like a lot (that’s just $41.66 more per month), but it could lower your taxable income. And thanks to the power of compounding interest, your retirement savings could grow faster each year.

For example, let’s say you’re 45 now and planning to retire at 65. You decide to max out your contribution to your 401(k), increasing it by $500 starting in 2020. You maintain that contribution level until you retire. Over the next 20 years, assuming a 6% annual rate of return, you could have $18,900 more in your retirement nest egg.1

Think of what you could you do in retirement with an additional $18,000-plus: take a big family vacation, pay a hefty debt, build that new sunroom you’ve been dreaming about for years?

Catch-up contribution limits for 2020

Savers 50 and older may be able to set aside more money in their employer’s plan (if allowed by the plan) in 2020 to help reach their retirement goals. The annual maximum catch-up contributions increased from $6,000 to $6,500 for many eligible plans:

  • 401(k),
  • 403(b),
  • most 457 plans, and
  • the federal government's Thrift Savings Plan.

Consider bumping up your current amounts to max out retirement contributions.

Note that the IRA catch-up contribution limit did not increase—that’s still at $1,000. 

Updates to income limits for IRA contributions

You can only contribute to a Roth IRA up to a certain income level. That limit increased for 2020. To contribute the full amount, you must make less than:

  • $124,000 if you’re single or head of household.
  • $196,000 if you’re married filing jointly.

If you’re already contributing to an employer-sponsored plan, like a 401(k), you can also contribute to a traditional IRA. But there are restrictions on what you can deduct from your taxes, based on your income. For 2020, those income ranges increased (get all the details on the IRS website). Depending how much money you make, you may be able to deduct more of your IRA contributions from your taxes.

2020 HSA contribution limits increase

If you’re already maxing out your 401(k) or other retirement contributions, consider putting pre-tax dollars toward an HSA, if you have one. Unlike a flexible spending account (FSA), you own your HSA, and it can be rolled over each year. Plus, it offers a triple tax advantage: money put in isn’t taxed, it grows tax-free, and you’re not taxed when you take money out to pay for medical expenses. 

Taking advantage of the increased 2020 HSA contribution limits may help you pay for health-related expenses down the line in retirement:

  • For self-coverage, you’ll now be able to put away $3,550 a year.
  • For family coverage, the new limit is $7,100.

When you haven’t started saving for retirement (yet)

No matter how far you are from retirement, don’t beat yourself up for not starting sooner. The important thing is to get started. 

Take the first step by setting aside a small amount of money. Then increase it over time when you can afford it. Read 5 steps to creating your retirement plan to help you get started.

One simple step

“I always tell people a good time to start is when you get a salary increase or a bonus or lump sum. Use it to your advantage. If your salary goes up 3%, taking 1% or 2% of that and putting it toward your retirement is money you likely won’t really miss,” says Heather Winston, CFP®, assistant director of financial advice and planning at Principal®.

Have a retirement account from your employer with services by Principal? Log in to increase your contributions.

“Of course, if your employer offers a matching contribution in its 401(k) plan, try to set aside enough to get that match. It increases your contribution rate,” Winston says. Otherwise, she says, you’re missing out on free money that could flow from them … to you.

Let’s say you find ways to save as little as $25 a week. That can make a difference over time. When contributing to a 401(k) plan for 20 years at a 6% rate of return, that amount could grow to more than $49,000.1

Now imagine if you could set aside even more.

Next steps

1 The assumed rate of return in this example is hypothetical and does not guarantee any future returns nor represent the returns of any particular investment. Amounts shown do not reflect the impact of taxes on pre-tax distributions. Individual taxpayer circumstances may vary. This is for illustrative purposes only.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Increasing your contribution does not guarantee you put yourself in a better spot. Investing involves risk, including possible loss of principal.

Insurance products and plan administrative services provided through Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC and/or independent broker-dealers. Principal Life, and Principal Securities are members of the Principal Financial Group®, Des Moines, Iowa 50392.