In November, the IRS announced increased contribution limits for the upcoming tax year. As wages continue to increase with high employment, the IRS has decided to raise 401(k) contribution limits once again. IRA and Roth IRA limits will not change.
The IRS has raised the 401(k) contribution limit by $500 three years in a row, with the 2020 limit set at $19,500. In addition to this change, the catch-up contribution limit has been raised from $6,000 to $6,500 (the first time this limit has increased since 2014/2015).
Furthermore, the government has become more lenient on total contributions (those from employees and employers combined) with the limit once again being increased from $56,000 last year to $57,000 in 2020. After nearly two decades of being set at a flat $30,000 and not changing in the 80s and 90s, this limit has been steadily rising ever since with only 3 years in the last 20 without an increase.
Newer to this group is HSA limits, which also saw an increase from $3,500 to $3,550 for individuals and $7,000 to $7,100 for families. These accounts are beneficial because they are the only account that can be triple tax advantaged, meaning you never pay tax on the contribution, you don’t pay tax on the growth, and it can be distributed tax-free.
By continuing to increase these limits, the IRS remains committed to helping individuals fund and secure their retirements as defined benefit and pension plans continue to be less and less common. Employers are simply unwilling to accept the investment risks and unknown longevity risks that come with these plans, putting the ultimate responsibility in the hands of the individual employees.
However, as pension plans are used less frequently, employer matches (and some very generous ones) have become a more standard practice. There are a few things to keep in mind.
- If possible, at least get the match.
By not contributing anything to a plan, you are likely forfeiting the opportunity for free money. Employers have a vested interest in increasing your job satisfaction and retirement security, and employees have come to expect this form of compensation.
- Don’t forget about the vesting schedule.
While employers are interested in helping you retire, they also want to retain employees for a reasonable time frame. Therefore, many employers use a vesting schedule that requires you to work for the company for a specified number of years before the contributions made to your retirement plan fully become yours.
Note: There is never a vesting schedule on contributions you make to an employer plan.
- Understand your plan’s rules – and ask for help if you need it.
Nearly every retirement plan is unique. Some rules are standard and set by the IRS, but there are a lot of options employers can use, and some aren’t employee friendly. Recently, we have seen an uptick in clients not getting the highest possible match from their employer. Here’s how:
One option in 401(k) plans is for employers to match by contribution or by income. For example, if you make $10,000/paycheck and elect to defer 10% of your salary, then every month you will make a $1,000 contribution, and your employer match is 3%. That means your employer will put in $300/paycheck. After 19 pay periods, you have maxed out your retirement contribution of $19,000, and your employer will stop pulling $1,000 from your paycheck. Depending on how the plan is written, the employer could also stop putting in their $300.
Let’s do some math...
$1,000 * 19 = $19,000 (the max for 2019)
$300 * 19 = $5,700
Assuming you get paid every two weeks, your salary is $260,000.
$5,700 / $260,000 is only 2.2%
Because you maxed out your contribution before the end of the year, your company may have been able to avoid the full 3% match. Some companies will continue to make their contribution, and some will do a “true-up” at the end of the year, but in many cases, you may not receive the full 3%.
Be sure to check with your payroll or benefits department to make sure you are getting the full match. As always, our advisors are here to help if you have questions!