The 2020 401k Contribution Limit Increased From 2019.
A 401k is a popular way for many Americans to save for retirement. The 401k was introduced in 1978. It is now the most popular employee-sponsored retirement plan in the country. Millions of workers contribute to their plans every year. The current 401k contribution limit for 2020 has increased, allowing individuals to save more for retirement.
Maximum 401k Contribution Limit
401k contribution limits have increased from 2019. If you are younger than age 50, your 401k contribution limit is up to $19,500. The 2020 401k contribution limit for individuals over age 50 is $26,000. For individuals over 50, there is a $6,500 “catch-up” amount that can be added. “Catch-up” contributions allow individuals over 50 to put more money in their 401k’s because they are closer to retirement age.
The overall 2020 contribution limit for individuals under age 50 is $57,000. This is a $1,000 increase from 2019. The overall 2020 contribution limit includes elective deferrals, nonelective deferrals, employer contributions, and allocations of forfeitures. If you are over age 50, your overall 401k contribution limit is $63,500, which includes a “catch-up” contribution.
Contributing to a 401k is beneficial to every worker whose employer sponsors it. Money contributed to a 401k is not taxed. For example, if you make $6,000 every month and you want to contribute $1,000 out of your paycheck to your 401k, only $5,000 of your monthly income is taxed. 401k contributions decrease your taxable income and lower your tax bill. As long as the money stays in your account, it will not be taxed.
Many employers often match employees contributions as an incentive for employees to work at their companies. Some companies even contribute to a worker’s account whether a worker is putting money into the plan or not. According to the Plan Sponsor Council of America, employers contributed about 5.2% of an employee’s pay to an employee’s 401k account.
It is recommended by financial planners that an individual saves at least 15% of their income towards retirement to live comfortably. This number includes any employer match. Not all of the 15% has to go in a 401k though. Some income can go into an IRA. It is advised an individual contributes at least the amount his/her employer matches. No matter what age you are, you’re going to need money when you.
According to a Transamerica survey, baby boomers are only saving an average of $144,000. Gen Xers and Millennials are even further behind. Transamerica also reported that Gen Xer’s have only saved about $64,000 and Millennials have about $23,000 for retirement. The amount of money an individual needs in retirement is dependent upon a few factors like what Social Security will pay, what other income sources you may have, what your average expenses are, and what medical expenses you may inquire.
How to Fund Your Retirement
Stuart Ritter, a financial planner with T. Rowell Price, recommends that if it’s difficult for an individual it’s not hard save 15%, then to increase the amount they are saving by 2% each year. For example, if an individual is saving 10% one year, he/she should increase it by 2% the next year, 4% the year after that, and so on. You will reach your maximum 401k contribution limit.
Currently, baby boomers collect about $18,000 a year in Social Security. The Bureau of Labor and Statistics noted individuals over the age of 65 spend about $46,000 annually. $144,000 in a 401k will not be enough for comfortable, long-term living.
If you are age 65 or older and do not have a substantial amount saved for your retirement, consider the following options to have more money in retirement. Think about delaying retirement or finding a way to make extra income like driving for a rideshare company in your free time. You may also want to think about downsizing your living space. Less room costs less money. Consider finding a part-time job after you retire from your career. Pick something you enjoy such as working for a local library or in a retail store you like.
If you are a younger than age 50, than there are some things you can do to ensure you have enough saved for retirement. Look for a side job and put that income into an IRA. Create a savings plan and stick to it. Pick one expense don’t need, such as weekly manicures, and put that money into your retirement account. A little can go a long way. Take advantage of the inreased 401k contribution limit as well.
An employer-sponsored retirement fund is a great way to set aside income for when you need it. The 401k contribution limit has gone up and now is the time to save for your future.