(StatePoint) Workplace retirement plans, including 401(k)s, 403(b)s and 457 plans, provide an important long-term savings tool for many Americans. About 55 percent of U.S. workers across public and private sectors participated in workplace retirement plans in 2018, according to the Bureau of Labor Statistics.
The Internal Revenue Service annually updates contribution limits and rules for 401(k)s and other workplace retirement plans, and its 2020 revision included several important changes. Here is what to know:
• As of January 1, 2020, employees can make elective, pre-tax or Roth contributions up to $19,500 to their own workplace retirement accounts (up from $19,000 in 2019).
• Individuals who are at least age 50 in 2020 may set aside an extra $6,500 in the form of pre-tax or Roth contributions (up from $6,000 in 2019) within their workplace retirement accounts. This is often referred to as a “catch-up contribution.”
• The total amount (both employee and employer contributions) that can be contributed to a workplace retirement plan in 2020 cannot exceed $57,000. For employees who are eligible to make catch-up contributions, the limit is adjusted up to $63,500. Rollovers, if permitted by a workplace retirement plan, are not subject to these contribution limits.
In conjunction with these new rules, financial experts say there are some distinctive opportunities for 401(k) participants to make the most of their savings plan this year. Here are three strategies to consider:
1. Do not leave money on the table. According to a Financial Engines report, nearly one out of four American workers miss out on their full 401(k) matching opportunity -- an average of $1,336 per person -- each year because they do not contribute enough to the plan.
2. Get extra credit for your plan contributions. The Retirement Savings Contributions Credit (also known as the Saver’s Credit) is a tax break for individuals with modest incomes who contribute to a retirement account. In 2020, the credit will be worth up to 50 percent of the first $2,000 saved for retirement.
3. Know your own number. While it is a good rule-of-thumb to replace 60 to 80 percent of your work pay in retirement, what is the real amount that will meet your specific needs? To what extent will your plan contributions in 2020 support your personal retirement goal? Having a defined retirement goal helps shape your overall plan.
A Certified Financial Planner can help you learn more about the new 401(k) contribution limits and understand how they fit into your own financial plan. You can find a CFP professional near you by visiting www.letsmakeaplan.org. Your workplace benefits specialist or retirement plan provider can also provide more information about the contribution and investment options available to help you maximize your plan.
Staying on top of the year-to-year rule changes related to retirement plan contribution limits can help you to ensure you maximize your savings and meet your retirement goals.
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