As the year comes to a close, it is not too late for taxpayers to maximize contributions to their retirement saving accounts in 2019. Similarly, with the IRS’s recently announced cost-of-living adjustments to retirement account contribution limits for 2020, it’s now too early to begin planning for next year and the tax returns you will file in 2021.
Workers who are eligible to participate in an employer-sponsored 401(k), 403(b), 457 plans will be able to contribute up to $19,500 in pre-tax dollars to these plan in 2020, a $500 increase from 2019. The 401(k) catch-up contribution for savers age 50 or older also increases $500 in 2020 to $6,500. Workers have until Dec. 31 to make contributions via salary deferral. However, when the worker is also a business owner, he or she will have until the April tax filing deadline to make the deferral contribution.
For 2020, the maximum amount taxpayers can contribute all of their IRAs and Roth IRAs will remain at $6,000, plus an additional $1,000 for qualifying savers age 50 and older. The amount of the deduction may be reduced based on a taxpayer’s access to a retirement plan through his or her employer or a spouse’s employer as well as his or her filing status and modified adjusted gross income (AGI).
If taxpayers earn too much to contribute to Roth IRAs in the current year, they can instead make contributions to a traditional IRA today and later convert it to a Roth for the benefit of tax-free distributions after they reach age 59 ½ and have owned the Roth IRA account for at least five years. While this “back-door IRA” is legal under the current tax law and the provisions of the Tax Cuts and Jobs Act (TCJA), it is possible that a new presidential administration will eliminate the availability of this strategy.
In general, IRA contributions must be made by the April 15 tax filing deadline for tax year of the contribution. Therefore, contributions intended for the 2019 tax year must be made by April 15, 2020. This additional three-and-a-half months of time past the end of a tax year allows individuals to assess their tax liabilities for the current year and determine whether it would be more beneficial to take a tax break this year by contributing to a traditional IRA or paying taxes now on a contributions to a Roth IRA, for which future withdrawals in retirement will be tax free.
Self-employed small business owner can save up to $57,000 in a SEP IRA or solo 401(k) in 2020, a $1,000 increase from the prior year. The contribution is based on the amount the taxpayer can contribute as an employer as a percentage of his or her salary, subject to income limitations.
The contributions qualifying taxpayers can make to SIMPLE retirement accounts increases to $13,500 in 2020, with catch up contributions of $3000 for taxpayers age 50 and older.
About the Author: Sean Deviney is a CFP®* professional, a retirement plan advisor and a director with Provenance Wealth Advisors (PWA), an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors + CPAs. For more information, call (954) 712-8888 or email firstname.lastname@example.org.
Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Sean Deviney is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional. The information contained in this report has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Investments mentioned may not be suitable for all investors. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
* Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.