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401k Contribution Limits for 2020: What Are They?

The 401k contribution limits for 2020 is $500 more than the contribution limits for the year of 2019. If you’re at least younger than 50 years old, you can contribute up to $19,500 in 2020. The 401k contribution limits for older employees, i.e., 50 years and older, is $19,500 plus an extra $6500.

That extra is called a catch up contribution limit. That brings the total 401k contribution limits to $26,000 (for tax year 2020), for those 50 and older.

If you work for a profit employer, you may have access to a 401k plan. If so, a good advice is to take advantage of it as a 401k plan is perhaps the best tax-advantaged retirement there is.

In fact, the money you contribute to the 401k plan grows tax free until you take it out. That also means interest and/or dividends you receive grows on a tax deferred basis. Also, the money you contribute to your 401k plan is tax deductible.

So, even if you can’t afford to take advantage of the full 2020 401k contribution limits, you should absolutely contribute something no matter how small. That way you can reach your retirement goals sooner.

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What is a 401k plan?

A 401k plan is a plan where your employer deducts a certain amount of money from your paycheck upon your request and puts it into a retirement account for you. Many employers offer a 401k plan.

If you’re lucky enough that your job offers one, you should participate. Not only is it the easiest way to save for retirement, but it also reduces and defer your taxes.

How does a 401k plan work?

If you decide to make 401k contributions in the year of 2020, not only should you know the maximum limits, but also you should know how it works.

Your employer sets up the 401k account for you with an approved investment firm such as Vanguard, Fidelity. You decide the maximum amount you want to contribute every paycheck.

That percentage is then deducted from your paycheck. It’s the easiest way to save money, because you don’t even miss the money.

You are responsible to choose your investments within the 401k accounts. It can be individual stocks, or a stock mutual fund, or a combination of stocks and bonds, or a stock and bong mutual fund, or a money market fund, etc.

Sometimes deciding what investment options to choose from, when you’re not well versed in the matter, can be difficult. But do not worry. This is where a company called Blooom comes in. They analyze your 401k account for you and help you grow it.

Click here to connect your 401k accounts to Blooom.

What are the 401k contribution limits for the year of 2020.

Just as every year, 401k contribution limits have been raised for 2020.

The maximum amount employees can contribute in their 401k plan in 2020 is $19,500 if they are younger than 50 years old. That contribution amount is $500 more than it was last year. The 401k contribution limits for employees who are 50 years and older is $19,500 plus an extra $6500, which brings the total contribution limits to $26,000 (for tax year 2020). The $6500 is just a catch-up contribution limit.

According to the IRS website, announcing the 401k contribution limits increase for 2020:

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $19,000 to $19,500.

The catch-up contribution limit for employees aged 50 and over who participate in these plans is increased from $6,000 to $6,500.”

Moreover, your contributions to a 401k plan is deductible on both state and federal taxes in the year you make them.

Benefits of matching your employer 401k contribution with the new limit

The higher 2020 401k contribution limits is not only the benefit of participating in your employer’s 401k plan. Another great benefit to a 401k plan is the employer matching. In most cases, your employer offers a match. It can be dollar for dollar or 50 cents for each dollar.

How much should you save with the new 401k contribution limits to meet retirement savings goals?

When it comes to saving for retirement, most financial advisors who specialize in retirement planning would recommend saving 10% to 15% of your monthly paycheck. Let’s say you save 5% of your paycheck and your employer matches another 5%, that’s already a 10% savings rate.

Of course, you can save more money each month. Again, beware of the contribution maximum limit for a 401k for 2020. Whatever 10 or 15% of your paycheck is, it can not be more than $19,500 for 50 or younger, or more than $26000 for 50 and older.

The 401k contribution limits change every year, so make sure you check the limit amount for that year.

If you’re not sure if your 401k or IRA accounts are doing well, Blooom can help you. Blooom is an online retirement management software that can help you grow your 401k or IRA accounts.

They will do a free analysis of your account and get you personalized suggestions on how to invest your current 401k in minutes.

Click here to connect your 401k accounts to Blooom.

Withdrawing money from a 401k account

When you contribute to a 401k plan, tax is deferred until you reach the age of 59 1/2. However, there is a 10% penalty tax for withdrawing money before that age. However there several exceptions.

Withdrawing money

There are instances where you can withdraw money before reaching age 59 1/2, like becoming totally disabled. But you will have to show some type of hardship. A hardship is defined as your inability is to pay for medical expenses for yourself or an ill member of the family.

To meet that hardship, however, you must be able to show that you cannot get the money anywhere else.

Borrowing money from your 401k

Some 401k plans allow employees to borrow money from them. By law, you can borrow up to half the amount invested and no more than $50,000.

Borrowing money from your 401k is the same as taking out a loan. That means you’ll pay interest on the loan. The one exception is that the interest rate is so much lower than that a personal loan from a bank. Another exception is that the loan most be repaid fully within 5 years.

You’ll pay a 10% penalty on the money you take out, plus federal and state taxes on the whole amount. For example, if you take out $10,000 from your 401k plan before age 59 1/2, you will get hit with a penalty plus any taxes on the entire $10,000.

However, you will not pay a penalty if you can show that you become totally disabled; a court order instructing to give the money to an ex-spouse after a divorce or a dependent child; you die and your beneficiaries are collecting the money.

Tips for taking advantage of the new 401k contribution limits

The IRS increase the 401k contribution limits every year. These past four years alone, they have increased the 401k limits by $500. This year (2020) the max 401k limit is $19,500. That’s a lot of money that can grow tax free in your account. So follow the below tips to maximize your retirement account.

  • Participate. The best way to take advantage of the new 401k contribution limits is to participate in your employer 401k plan. Again the money grows tax free until you take it out. Also, your contribution is deducted from your paycheck, so don’t ven miss it. Indeed, it is an automatic way to save for retirement.
  • Make the maximum contribution. The 401k limits for 2020 is $19,500. That’s a lot of money you can contribute. So max it out.
  • Take advantage of your employer match. In addition to the maximum contribution of $19500 you can make to your 401k, your employer also contributes. In some cases, they match dollar for dollar or 50 cents for each dollar the worker pays in.
  • Make small contributions to your 401k. Even if you can’t afford the make the higher 401k contribution limits, you should contribute some amount no matter how small. Not doing so if leaving free money on the table.

In conclusion, if you’re wondering what are the 401k contribution limits for the year of 2020, you have got it. You can contribute up to $19,500 if you are younger than 50 years old. The 401k contribution limits for employee who are 50 years or older is $26,000. Again, your money in a 401k plan grows tax free. Participating in your employer’s 401k plan is one of the best ways to become a millionaire.

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Still have more questions about 401k contribution limits for 2020? A financial Advisor can help

You can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc). Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.

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