Standard & itemized tax deductions for the 2020 tax year
Tax deductions & credits affected in 2020 by inflation

Retirement plan tax inflation adjustments for 2020


Welcome to Part 3 of the ol' blog's 2020 series on tax inflation adjustments. 
We started on Nov. 6 with a look at next year's income tax brackets and rates.
Today we look at allowable annual retirement plan contributions amounts,
and, for some taxpayers, tax deduction options and limitations.
Note: The 2020 figures in this post apply to 2020 returns to be filed in 2021.
For comparison purposes, you'll also find 2019 amounts to be used
in filing 2019 returns due April 15, 2020.


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Contributing as much as you can, and as much as the tax laws say you can, to your retirement plans will let you enjoy your post-work years the way you want.

Whether you have just a few years or decades before you retire, the tax code offers ways to enhance your post-work nest egg.

And every year, depending on inflation, there's a possibility that your retirement contributions will be larger.

That's the case for the coming 2020 tax year.

The Internal Revenue Service this week issued the amounts, revised annually based on inflation-affected cost‑of‑living adjustments, or COLAs, that will affect the various tax-advantaged retirement plans.

Here are the highlights of what will, or some cases won't, change when it comes to retirement accounts in 2020.

No change for IRA contributions: Individual retirement arrangements, or IRAs as they are popularly known, are a great way to save for post-work years.

You can contribute to a traditional IRA with pre-tax dollars and possibly claim a deduction for at least some of the amount you're saving.

Or you can put already-taxed money into a Roth IRA and not have to worry about taxes on that retirement account every again.

When it comes to either type of IRAs in 2020, inflation was not enough to mean an increase in the contribution limit. In 2020 it will remain at the 2019 level of $6,000.

The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and therefore remains at $1,000.

More earnings for IRA maneuverability: The IRS has, however, increased the income ranges for 2020 that determine whether you can make deductible contributions to a traditional IRA, contribute at all to a Roth IRA and/or claim the Saver's Credit.

Traditional IRAs are still popular because if you or your spouse don't have retirement plans at work, you can deduct your full IRA contribution.

If, however, either spouse is covered by a workplace retirement plan, the deductible amount of a traditional IRA contribution is phased out or totally eliminated depending on your filing status and income.

The table below shows how much more you can make in 2020 before you hit the level where your traditional IRA contributions are reduced or are no longer deductible. The 2019 amounts are shown, too, to give you an idea of the change and because you can still contribute to your IRA for the 2019 tax year.

 

 2019 phase-out range 
 based on MAGI*

 2020 phase-out range 
 based on MAGI*

 Singles and
 Heads of Households

 who are covered at work 
 by a retirement plan

 $64,000 to $74,000 

 $65,000 to $75,000 

 Married couples
 filing jointly 
 & the spouse making the
 contribution is covered by a
 workplace retirement plan

 $103,000 to $123,000

 $104,000 to $124,000

 Married couples
 filing jointly
 & the contributing spouse
 has no workplace plan
 but his/her spouse is offered
 a workplace retirement plan

 $193,000 and $203,000

 $196,000 and $206,000

 Married individual
 filing a separate return
 
 & is covered by a workplace 
 retirement plan**

 $0 to $10,000

 $0 to $10,000

*MAGI is modified adjusted gross income (Shameless plug: You can check out the ol' blog's glossary for more on MAGI, 
as well as the previously mentioned individual retirement arrangement/account and lots of other tax terms.)
**There is no annual inflation adjustment in married filing separately situations

More room for Roth contributions: Roth IRA contributions are not tax deductible when you make them, but withdrawals when you retire are not taxed.

These accounts also have some income limits.

For 2020, the amount you can put into a Roth is reduced if your earnings are within the income range for your filing status in the following table. Again, the 2019 amounts are included for comparison and tax planning for the rest of this year.

 

 2019 phase-out range
 based on MAGI

 2020 phase-out range
 based on MAGI 

 Singles and
 Heads of Households

 $122,000 to $137,000

 $124,000 to $139,000

 Married couples filing jointly

 $193,000 to $203,000

 $196,000 to $206,000


Again, note the top dollar amounts. Once your income exceeds the maximum amount for your filing status, you cannot contribute to a Roth IRA.

You can, however, contribute to a traditional IRA and then convert that account to a Roth IRA.

Just like a traditional IRA, the phase-out range for a married individual making Roth contributions while filing a separate tax return is not subject to an annual COLA and stays at $0 to $10,000.

Workplace plan changes, too: In addition to IRAs, some folks are able to stash retirement money in workplace defined contribution accounts known in the private sector as 401(k)s.

The tax code monikers are slightly different for folks employed by other groups — 403(b) for some nonprofits and teachers, 457 plans for certain government employees and Uncle Sam's Thrift Savings Plan (TSP) for civil service employees and retirees, as well as for members of the uniformed services — but the same COLA changes tend to apply.

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the TSP increases to a maximum of $19,500 in 2020. That's a $500 bump up from 2019's limit of $19,000.

Catch-up contribution limits for employees age 50 and older who participate in these plans also was increased by that same amount, going from $6,000 in 2019 to $6,500 in 2020.

And if you're lucky enough to work for a place that has an old-school defined benefit plan — this is where your boss takes total care of your retirement fund — there's good news there for next year, too. The limitation on the annual benefit of this retirement plan goes up in 2020 to $230,000 from the 2019 limit of $225,000.

Self-employed plan bumps: When you're the boss at your own company, in addition to concentrating on turning a profit, you need to think about the day when you decided to relinquish control.

SEP-IRAs (or, from the glossary, Simplified Employee Pension) and Solo 401(k) are popular retirement vehicles for the self-employed and small business owners.

The maximum amount that can be put into either of these plans as an employer is determined by a percentage of salary. Once those calculations are completed (thank goodness for tax pros and/or tax software!), the maximum in 2020 will be $57,000. It's $1,000 more than the $56,000 allowed in 2019.

The amount of earnings amount used to figure your SEP or SoloK contribution also goes up next year. The compensation of $280,000 in 2019 goes to $285,000 in 2020.

If you have a SIMPLE, or savings incentive match plan for employees (final, I swear, glossary plug), the limit on SIMPLE plans for 2020 goes up to $13,500 from the $13,000 cap in 2019. The SIMPLE catch-up limit next year, however, remains at $3,000.

Added credit for saving: The Saver's Credit, or the Retirement Savings Contributions Credit as it's officially titled, is a tax break the rewards low- and moderate-income individual for adding to their nest eggs.

This credit, which is a dollar-for-dollar reduction in any tax you owe, is $1,000.

You can claim the Saver's Credit based on the money you put into IRAs and workplace plans, either where you are an employee or are self-employed. But it is not available if you make more than the earnings limit for your filing status.

In 2020, the Saver's Credit maximum earnings caps go to:

  • $65,000 for married couples filing jointly, up from 2019's limit of $64,000;
  • $48,750 for heads of household, up from $48,000 for 2019; and
  • $32,500 for singles and married filing separately filers, up from $32,000 in 2019.

Here's the full table and percentages, based on your adjusted gross income (AGI) for the 2020 Retirement Saver's Credit:

 Credit Amount

 Single,
 married filing separately
 or qualifying widow(er)

 Married
 filing jointly

 Head
 of household

 50% of your
 contribution

 AGI not more than $19,500

 AGI not more than
 $39,000

 AGI not more than
 $29,250

 20% of your
 contribution

 $19,501 - $21,250

 $39,001 - $42,500

 $29,251 - $31,875

 10% of your
 contribution

 $20,251 - $32,500

 $42,501 - $65,000

 $31,876 - $48,750

 No credit

 $32,501 or more

 $65,001 or more

 $48,751 or more


These retirement plan inflation adjustments are a lot of numbers, but if you want more, you can peruse the official details on the 2020 COLA changes in IRS Notice 2019-59.

More inflation figures: As noted in the intro to this post, you can read the first part of the  10-part 2020 tax inflation series with details on next year's tax rates and income brackets.

You'll also find at the end of that post an index of what's coming up, along with links to posts on next year's tax inflation effects that are already published.

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