People looking to increase their retirement savings are in luck.
The Internal Revenue Service (IRS) increased contribution limits for anyone with a 401(k) or 403(b), two kinds of workplace retirement plan. The IRS made the changes as part of its adjustments to tax rates for the tax year 2020, which begins January 1.
People who have either type of account will now be able to put an additional $500 away annually, for a total of $19,500. People who are 50 or older can also put an additional $500 away as part of their catch-up contributions, which we’ll explain below.
Taxpayers will generally file their returns for 2020 in April, 2021.
What’s a 401(k) and 403(b)?
A 401(k) is a qualified employer-provided retirement plan, meaning it satisfies federal tax guidelines for such plans. Often, an employer will provide this plan to employees with an additional perk, called a matching contribution. This means that employers match the funds you place into your account, generally up to a certain percentage, potentially allowing you to save more, faster.
A 403(b) is similar to a 401(k), but it’s offered to public school employees, and some workers for tax-exempt organizations.
You typically contribute funds to a 401(k) or 403(b) from pre-tax income, which can lower your taxable income. However, this does not mean you won’t pay taxes. You must pay taxes when you start withdrawing money from the account, typically after age 70 ½.
There is also something called a Roth 401(k) and Roth 403(b), which allow workers to contribute to their retirement accounts with after-tax income.
Starting next year, workers under age 50 can deposit up to $19,500 per year into either type of account. Over age 50, workers can make additional contributions of $6,500, up from $6,000 in 2019.
What about IRAs?
The new IRS adjustments do not affect Individual Retirement Account (IRA) contribution limits for 2020.
In contrast to a 401(k) and 403(b), which are sponsored by employers, anyone can open up an IRA through a brokerage, or financial institution.
Similar to a 401(k), contributions to a traditional IRA are made on a pre-tax basis, and they can lower your taxable income. You must also pay taxes when you start withdrawing money from the account, typically after age 70 ½.
There is also something called a Roth IRA. With a Roth IRA, as with Roth workplace-sponsored plans, taxes work the other way around. You pay tax on any income you contribute to the account. After that point you don’t have to pay any tax on that money or on any of its investment gains—you can withdraw any funds in the account tax-free, as long as you stick to some basic rules. In basic terms, the main difference between the two, with a Roth IRA you pay taxes now, and with a Traditional IRA you pay taxes later
Your total contribution to both a traditional and Roth IRA can’t exceed the contribution limits: $6,000 in 2019, or $7,000 for people who are 50 or older.
You can set up an IRA retirement account with Stash. Find out more about IRAs here.