Retirement | May 22, 2020

Take Advantage of New 401(k) Limits for 2020

For the second consecutive year, the IRS has increased contribution limits for 401(k) and 403(b) plans, as well as Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs).

Not only do these new limits allow you to save more (see “The new contribution limits…,” below), they also allow you to do so on a pretax basis, which could reduce your tax bill.

“The value of saving as much as you can in a 401(k) or an HSA, in particular, is twofold,” says Mark Riepe, head of the Schwab Center for Financial Research. “First, tax-deferred contributions to such accounts reduce your taxable income dollar for dollar—which is a huge benefit in its own right. Second, every extra dollar you save is one that stands to benefit from compound growth over time.” (See “…and why you should max out,” below.)

The new contribution limits …

Plan type

2019 max

2020 max

Change

401(k), 403(b), or similar

$19,000

$19,500

+$500

401(k), 403(b), or similar catchup contribution

$6,000

$6,500

+$500

FSA

$2,700

$2,750

+$50

HSA (family)

$7,000

$7,100

+$100

HSA (individual)

$3,500

$3,550

+$50

 

… and why you should max out
Two hypothetical investors started contributing to their 401(k)s in 2000 and maxed out their accounts in the first year. In the years following, Investor 1 never increased his annual contribution, while Investor 2 maxed out her account every year, taking full advantage each and every time the IRS raised contribution limits. By the end of 2019, Investor 2 had accumulated 41% more than Investor 1.

This chart is hypothetical and for illustrative purposes only. Annual returns for both portfolios are represented by the S&P 500® Index’s year-end returns from 2000 through 2019. Investor 1’s portfolio assumes an annual contribution of $10,500 from 2000 through 2019. Investor 2’s portfolio assumes maximum annual contributions, starting with $10,500 in 2000 and adjusting as necessary in future years to meet the IRS limits. Neither portfolio reflects the effects of fees, taxes, or catchup contributions. Indexes are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly.

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