401k contribution limits for 2020 are $19,500 per person. All 401k participants over the age of 50 can add a catch-up contribution of $6,500.
What is 401k?
401k plan is a workplace retirement plan where both employees and employers can make retirement contributions. These retirement plans can be one of the easiest and most effective ways to save for retirement. As an employee, you can make automatic contributions to your 401k directly through your company payroll. You can choose the percentage of your salary that will go towards your retirement savings, Most 401k will provide you with multiple investment options in stocks and fixed income. Additionally, most companies offer a 401k match up to a certain percentage. In most cases, you need to participate in the plan in order to get the match.
There are two types of contributions – traditional 401k tax-deferred and tax-exempt Roth 401k contributions.
Most employees, typically, choose to make tax-deferred 401k contributions. These payments are tax-deductible. They will lower your tax bill for the current tax year. Your investments will grow on a tax-deferred basis. Therefore, you will only owe federal and state taxes when you start withdrawing your savings.
Roth 401k contributions are pretax. It means that you will pay all federal and state taxes before making your contributions. The advantage of Roth 401k is that your retirement savings will grow tax-free. As long as you keep your money until retirement, you will withdraw your gain tax-free. It’s a great alternative for young professionals and workers in a low tax bracket.
How much can I contribute to my 401k in 2020?
401k contribution limits change every year. IRS typically increases the maximum annual limit with the cost of living adjustment and inflation. These contribution limits apply to all employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan. Additionally, the limits apply to both tax-deferred and Roth contributions combined.
- Employees can contribute up to $19,500 to their 401(k) plan for 2020, $500 more than 2019.
- Employees of age 50 or over are eligible for an additional catch-up contribution of $6,500 in 2020, $500 higher than 2019
- The employee compensation limit for calculating 401k contributions is $285,000, $5,000 more than 2019
- Companies can make a matching contribution up to the combined limit of $57,000 or $63,500 with the catch-up contribution. If an employee makes the maximum allowed contribution, the company match cannot exceed $37,500 in 2020.
Solo 401k contribution limits 2020
A solo 401k plan is a type of 401k plan with one participant. Those are usually solo entrepreneurs, consultants, freelancers, and other small business owners. Self-employed individuals can take advantage of solo 401k plans and save for retirement.
- The maximum contribution limit in 2020 for a solo 401k plan is $57,000 or $63,500 with catch-up contributions. Solo entrepreneurs can make contributions both as an employee and an employer.
- The employee contribution cannot exceed $19,500 in the solo 401(k) plan for 2020.
- Self-employed 401k participants, age 50 or over are eligible for an additional catch-up contribution of $6,500 in 2020.
- The total self-employed compensation limit for calculating solo 401k contributions is $285,000.
- Employer contribution cannot exceed 25% of the compensation
- If you participate in more than one 401k plan at the same time, you are subject to the same annual limits for all plans.
Please note that if you are self-employed and decide to hire other employees, they will have to be included in the 401k plan if they meet the plan eligibility requirements.