Recently we learned that Social Security recipients will receive a 1.6 percent cost of living adjustment (COLA) next year. Annual COLAs are based on specific inflation data from the Bureau of Labor Statistics, and the government will sometimes make similar adjustments to the annual limits on the dollar amount of contributions that can be made to popular tax-advantaged savings vehicles.
With 401(k) plans, for instance, current law allows individuals to contribute up to $19,000 each year (plus another $6,000 for participants ages 50 and older). As for IRAs, the annual cap is $6,000, along with an extra $1,000 in catch-up contributions for older savers. Most of these ceilings are required by law to be adjusted annually for cost-of-living increases, and inflation was indeed high enough this year to warrant a change in some of the above-mentioned limits. For example, individuals who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan will be able to contribute a maximum of $19,500 to these savings vehicles in 2020.
The cap on annual contributions that can be made to an IRA, though, will not rise in 2020 due to insufficient household inflation. As for catch-up contributions, the ceiling for 401(k)s will lift to $6,500 next year, the first increase in half a decade, while the additional IRA allowance will be left unchanged. Another noteworthy adjustment is that the income ranges for determining eligibility to make deductible contributions to traditional IRAs, to contribute to Roth IRAs, and to claim the Saver’s Credit will all increase next year. More details on these and various other alterations that will occur in 2020 can be found in IRS Notice 2019-59.
For some these increases may not seem significant, but an earlier NerdWallet analysis estimated that a 30-year-old who starts investing an additional $500 each year (just $42 a month) could have an extra $70,212 by the time he or she retires. Even for those unable to start until age 40, investing just $500 more every year could still add $34,712 to their retirement nest egg. Most 401(k) participants are already far enough below the annual limit to make these additional contributions, and a growing number of plan sponsors are utilizing automatic escalation and other techniques to nudge workers into more effective savings rates.
Sources: U.S. IRS, Boston College (CRR), WSJ, CNBC, NerdWallet