Planning for retirement is one of the most important things you can do with your earnings, and many employees (and their employers) can contribute to retirement funds like 401(k)s and 403(b)s. However, contributions have limitations that sometimes undergo changes. In the past two Novembers, the IRS made some important raises to the contribution limit of retirement accounts for 2019 and 2020.
These changes include:
- 401(k) and 403(b) contribution limits were raised to $19,000 in 2019 and $19,500 in 2020.
- Catch-up contributions for those over the age of 50 were raised to $6,000 in 2019 and $6,500 in 2020.
- Combined employer/employee contributions are $56,000 in 2019 and being raised to $57,000 in 2020.
- SIMPLE retirement account contributions are $13,000 in 2019 and $13,500 in 2020.
- Contributions to an IRA were raised in 2019 (for the first time since 2013) to $6,000 and remain at that limit for 2020.
So how do all these changes affect you? Read on to find out why you should care about these raises to the contribution limit to retirement accounts.
Support a Longer Life
This one may be obvious, but the more money you put away per year, the more overall savings you have over time. The whole point of saving for retirement is that, one day, you may retire from your career and no longer receive a steady income. Planning for that time is how you can take action to financially support your future self. With continuing advances in the medical world, people are living longer and spending more time in retirement, so more money is needed to support that longer retired life. The increase in contribution limits to retirement accounts allows you to save significantly more money over time.
Plan for Inflation
As the years go by, the cost of living often increases due to inflation. The prices of food and clothing today likely doesn’t reflect what food and clothing will cost thirty years from now. The more money you can put away for retirement, the better prepared you will be for inflated prices when the time comes for you to retire.
Save Money on Your Taxes
When employees put money away in retirement accounts, that money is often pre-tax, meaning their taxable income is now lower because it does not include the money contributed to 401(ks) and 403(b)s. So not only are you saving money for the future, you are being taxed for that year on a smaller salary number, perhaps even putting you in a lower tax bracket. That means that the more money you can put away for retirement, the less taxable income you report to the IRS, and the lower your taxes become for that year. Additionally, by the time you use the money from your retirement accounts, you will likely be in a lower tax bracket because you will be retired (and no longer receiving the income you received during the prime of your career), in which case the amount of taxes you pay on that saved money will also be lower. In terms of IRA accounts, contributions are only tax-deductible if your gross income falls below a certain amount, but they can sometimes be eligible for a partial deduction.
Make Contributions to Retirement Accounts Wisely
With all the different options for saving money for retirement, it’s important to consult a professional who can help you decide which kind of retirement accounts make sense for your needs. Each person’s financial situation is unique and requires a personalized plan, as well as continued conversation as finances and employment circumstances change throughout the years. At Desantis, Kiefer, Shall, & Sarcone, our experts work together with you to make the best financial choices for saving for your future.