Earlier this month, the Internal Revenue Service announced cost‑of‑living adjustments and increased retirement plan contribution limits for tax year 2020. The IRS raised the 401(k) contribution limit by $500 to $19,500, but the limit on contributions to individual retirement accounts remains $6,000. For plan participants aged 50 and over, the 401(k) catch-up contribution limit will also rise $500 for 2020.
As the IRS considers contribution limit changes annually to keep pace with inflation, we highly recommend that retirement plan sponsors encourage participants to reevaluate their contributions as well. IRS contribution limits can be a great conversation starter, and raising plan contributions just one percent can make a big difference in retirement funding over time.
Highlights for 2020 from IRS Notice 2019-59 include:
- Compensation. The annual employee compensation limit for calculating contributions will increase to $285,000, up from $280,000 in 2019 and $275,000 in 2018.
- Highly compensated employee (HCE). The highly compensated employee limit for 2020 will be $130,000, up from $125,000 in 2019 and $120,000 in 2018.
- Key employee/officer. The key employee limit in a top-heavy plan for 2020 will be $185,000, up from $180,000 in 2019 and $175,000 in 2018.
- Defined contribution limit. The limitation on the annual benefit under a defined contribution plan will increase to $57,000, up from $56,000 in 2019 and $55,000 in 2018.
- Maximum contributions. The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan will increase to $19,500 in 2020, up from $19,000 in 2019 and $18,500 in 2018.
- Maximum catch-up. The catch-up contribution limit for employees aged 50 and over who participate in these plans will increase to $6,500, up from $6,000 in both 2019 and 2018.
- Defined benefit limit. The limitation on the annual benefit under a defined benefit plan will increase to $230,000, up from $225,000 in 2019 and $220,000 in 2018.
- SIMPLE. The SIMPLE retirement account limit for 2020 will increase to $13,500, up from $13,000 in 2019 and $12,500 in 2018.
- SIMPLE catch-up. The SIMPLE catch-up contribution limit for employees aged 50 and over will remain $3,000, the same limit in 2019 and 2018.
- IRA contribution limit. The IRA contribution limit will remain $6,000, the same limit in 2019 which was up from $5,500 in 2018.
- IRA catch-up. The IRA catch-up contribution limit will remain $1,000, the same limit in 2019 and 2018.
Download printable infographic — Download our infographic for a visual summary.
Please contact us if you have any questions.