The annual tax-deferred amounts workers can set aside for their retirement will increase for 2020, the Internal Revenue Service (IRS) has announced.

Next year, the contribution limit for employees who take part in a 401(k) or similar plan, such as a 403(b), 457 or Thrift Savings Plan, will be $19,500, up from $19,000. For workers 50 and older, the additional so-called catch-up limit goes from $6,000 to $6,500, for a total limit of $26,000.

In a 401(k) account, taxes are not paid until the account holder begins withdrawing the money. Withdrawals are taxed as ordinary income. If a holder withdraws money before age 59 1/2, he or she is assessed a 10 percent surtax.

In addition, the IRS announced increased limits on annual income to determine if a contribution to a traditional individual retirement account (IRA) is tax deductible. Higher income limits also apply for contributions to a Roth IRA, on which taxes are paid initially but money grows tax free. Those increases on income limits are from $1,000 to $3,000 depending on your marital status and whether you and/or your spouse qualifies for a workplace retirement plan.

The new limits are listed on the IRS website.

Income tax brackets also will change, with each increase in marginal tax rates kicking in at a slightly higher income level.

Types of retirement plans

Some of the defined-contribution retirement savings plans covered in the IRS announcement:

  • 401(k) plan. This employer-sponsored retirement savings plan lets workers invest pretax wages. Companies often match a portion of contributions; income taxes are due when the money is taken out, generally at retirement.
  • 403(b) plan. This retirement savings plan is for some public school and tax-exempt organizations’ employees and resembles a 401(k) plan.
  • 457 plan. This retirement savings plan offered by state and local governments and some nonprofits operates similarly to a 401(k) plan.
  • Roth IRA. By investing money for retirement without any tax breaks now, individuals can grow their savings tax free and not pay taxes when the money is withdrawn in retirement.
  • Saver’s Credit. This tax credit, not merely a deduction, is for low- to moderate-income workers who contribute to an employer-sponsored retirement savings plan or IRA.
  • SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees Individual Retirement Account. This employer-sponsored retirement savings plan, similar to a 401(k) but with lower administrative costs, is designed for businesses with 100 or fewer employees.
  • Thrift Savings Plan. This tax-deferred retirement savings plan, similar to a 401(k), is for federal employees.
  • Traditional IRA. This tax-deferred way for an individual to save for retirement may give you a tax deduction now depending on your income. The withdrawals in retirement are taxed. 


This article was written by Kent Allen for AARP:

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