The Internal Revenue Service (IRS) respects your retirement saving efforts — to a point. In this post, we’ll cover various retirement saving contribution limits as they affect your 2020 income tax returns. There have been a few minor adjustments, but no big surprises.
Contribution limits in 2020
Let us look at a few of the specific changes to contribution limits.
- 401k, 403b, most 457 plans and Thrift Savings Plans: The IRS boosted contribution limits for these plans to $19,500 for the 2020 tax year. That’s a $500 increase over 2019. “Catch up” contributions on accounts for individuals age 50 and up are also increased by $500, to a total of $6,500.
- SIMPLE retirement accounts: Savings Incentive Match Plan for Employees (SIMPLE IRA) contributions are capped at $13,500 in 2020. That’s a $500 increase over last year.
- Traditional and Roth IRAs: Contribution limits for both Roth and traditional IRAs remain static at $6,000. Catch-up contributions also remain fixed at $1,000 for people age 50 and up. Keep in mind that only deposits in traditional IRAs will be tax-deferred (meaning you’ll pay taxes on these dollars when you withdraw them later during retirement). Roth IRA contributions are after-tax funds. They won’t decrease your taxable income.
While these changes may seem minor, they add up from one year to the next. Couple these retirement savings with an increased standard deduction for 2020, and tax season will look better!
Standard deductions for 2020
The IRS bumped up standard deductions for the 2020 tax year. The standard deduction is now $12,400 for singles — that’s up $200 since 2019 — and $24,800 for married couples filing jointly, an increase of $400.
Save more with a health savings account (HSA) in 2020
Health savings accounts (HSAs) allow you to put away pre-tax funds for healthcare and have them grow tax-free. You can withdraw these funds later to cover qualified health expenses. The IRS decides which healthcare expenses are covered, but they generally include:
- Prescription medications (and some over the counter drugs)
- Ambulance rides
- Hospital stays
- Anesthesia for surgery
- Birth control
- COBRA insurance replacement premiums
In 2020, you can put up to $3,550 in an HSA if you’re an individual with self-only health coverage. Account holders of family plans can save up to $7,100 in these accounts, an increase of $100 from 2019. There is no time limit for these funds. You can let them earn tax-free interest for years before spending them on healthcare.