2019, 2020 Contribution Limits For 401(k)s, IRAs, And HSAs

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Two out of three ain’t bad. The 2020 IRA contribution limit is the same as the 2019 IRA contribution limit.

But taxpayers will be able to contribute more to their 401(k) accounts and health savings accounts (HSAs) in 2020 than in 2019.

401(k)—With its latest inflation adjustment, the IRS has lifted the basic employee contribution limit for 401(k) accounts to $19,500. That’s up from 2019’s contribution cap of $19,000.

HSA—The 2020 cap on HSA contributions rises $50 to $3,550 for a person covering only him- or herself under a high-deductible health plan (HDHP). Someone with family coverage will be allowed to set aside up to $7,100 in 2020, up $100.

IRA—Of the three, only the IRA contribution limit will remain unchanged. The IRS will leave the 2019 IRA contribution limit in place for 2020, unchanged at $6,000.

IRA Contribution Limits

While the annual contribution cap on traditional and Roth IRAs will stay at the same $6,000 level, contribution ceilings on SEP IRAs and Simple IRAs will rise.

SEP IRAs are funded by employers, not employees. They are often set up by self-employed entrepreneurs, but they can be set up by bigger sole proprietorships, partnerships and corporations. The high contribution cap is a key benefit. The maximum limit for 2020 will be $57,000 vs. $56,000 for 2019, according to Garrett Watson, special projects manager of the Tax Foundation.

Simple IRAs contributions are based on a formula. Its bottom line is that employee contributions can be as high as $13,500 in 2020, up $500 from 2019, while the employer contribution ceiling will rise $500 to $43,500. Simple IRAs also permit catch-up contributions, allowing for workers who are age 50 or older to put in $3,000 more a year.

401(k) Contribution Limits

In addition to the hike in maximum basic contributions to 401(k) accounts permitted by workers, the cap on 401(k) catch-up contributions will also climb. The cap on 401(k) catch-up contributions by workers who are age 50 or older will rise to $6,500. That’s an increase of $500.

It is the first hike in the cap for 401(k) catch-up contributions in five years. Basic plus catch-up 401(k) contributions can total as much as $26,000 in 2020, an increase of $1,000 vs. 2019.

Maximum Combined Contributions To 401(k) Accounts

The ceiling on contributions to 401(k) accounts by employers will also increase. That amount will go up $500 to $37,500. The maximum contribution actually depends on a formula. Basically, in 2020 the combined cap on contributions by plan members and employers is 100% of the workers’ compensation or $57,000, whichever is lower. The dollar-figure part of that formula is $63,500 for workers who are 50 or older.

In 2019, the dollar-amount caps on those combined contributions by workers and their employers are $56,000 and $62,500. Those combined totals include the employers’ $37,000 max.

HSA Catch-Up Contributions

Catch-up contributions are also permitted for HSAs, but the age when you can start is later than it is for a $401(k) or IRA.

The additional catch-up contribution that an HDHP member who is age 55 or older can kick in to an HSA will remain unchanged at a max of $1,000 in 2020.

Additional HSA Benefits

An HSA works like an IRA for health care costs — only better, in some ways.

A traditional IRA gives an account owner two tax breaks: a tax deduction upfront on the amount of money contributed. And yearly tax-deferral on earnings as they build up, until money is withdrawn. An HSA offers those two tax breaks, plus a third one: if money that is withdrawn is spent on qualified health costs — which include deductibles levied by the HDHP insurance plan — then they are also tax free.

And remember that while you must have HDHP coverage to be eligible, you can get that coverage on your own if you are self-employed or your workplace does not offer a health plan. In any case, if your plan permits, you can make additional contributions up to the maximum allowed on your own.

 

Source: Investor’s Business Daily

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