Save (a bit) more in 2020 with new retirement plan contribution limits

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The IRS recently released the 2020 dollar limits for qualified retirement plan contributions, bumping up employees’ and owners’ ability to defer compensation and invest for their future. Because of low inflation, most of the common contribution levels increased by only $500, with defined contribution total dollar amounts (from employee and employer contributions combined) increasing by only $1,000.  Even though the increases in limits over 2019 are low, super savers who focus on saving the maximum allowed can boost their contribution(s) as follows:    

Click here for full IRS announcement of 2020 limits

Many employees are not saving enough, early enough

While retirement plan fiduciaries believe the limits are out of reach or exceed the savings needs of lower-income plan participants, under-savers that need to accelerate savings to get on track can benefit from reminders about the limits and encouraging savings increases. Only 13% of plan participants contribute the maximum amount yearly*, and 29% of those over age 55 have $0 retirement savings (excluding Social Security), while the average for those between ages 55-65 have $104,000**.

Higher wage earners also often under-save. Only 60% earning over $150,000 hit the limits*, and the consequences to their retirement lifestyle could be significant. Even if Social Security remains intact, it will replace less than 25% of the projected retirement income need for those earning more than $125,000, making independent savings essential.

Retirement plan design has evolved to encourage adequate savings through automatic enrollment and auto-escalation, but too many workers still delay retirement saving and then save too little. Delaying savings is a risk for many reasons, especially as you start to earn more.  Some workers earning over $130,000 may not have access to the full deferral limits every year.  As “highly-compensated employees” (HCE’s) they may have lower limits imposed on them if lower-paid workers at their company don’t participate, making plan design and participation critical.

There is some good news for certain HCE’s who are behind in their savings. The catch-up provisions that allow those over age 50 to contribute an additional $6,500 per year are not subject to the HCE restrictions, so even if their regular contributions are limited, they can still contribute the full $6,500 catch-up amount.

Benefits for Business Owners

Even for those whose net worth seems adequate to provide for retirement needs, maximizing retirement plan contribution provides financial benefits. Certain business owners, for example, can take advantage of higher plan limits, which serves to reduce current taxes and diversify net worth. In many cases, much of a business owner’s net worth is tied to the value of their business and building these retirement accounts allows more flexibility in cash flow and tax planning during retirement.

Contribute in line with your personal financial plan

For our personal wealth clients, reviewing available retirement plans, limits, and investment options is an integral part of ensuring that their financial life and goals are aligned. Contributing up to the allowable limits may not always be the answer, but ensuring that you are contributing the right amount and in the right types of accounts for your situation will make a meaningful difference in your ability to retire when, and how, you envision.

For our personal wealth clients, reviewing available retirement plans, limits, and investment options is an integral part of ensuring that their financial life and goals are aligned. Contributing up to the allowable limits may not always be the answer, but ensuring that you are contributing the right amount and in the right types of accounts for your situation will make a meaningful difference in your ability to retire when, and how, you envision.

*Vanguard 2019 Vanguard study of 5 million people.
** GAO study, 2015.

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