On November 6, 2019, the Internal Revenue Service released Notice 2019-59, announcing cost-of-living adjustments that affect contribution limits for retirement plans and retirement accounts in 2020. The list below, although not exhaustive, highlights key changes that retirement plan sponsors should be aware of, as well as some limitations that remain unchanged from 2019:
  • The elective deferral limit is increasing from $19,000 to $19,500.
  • The catch-up contribution limit for employees age 50 and older is increasing from $6,000 to $6,500.
  • The aggregate contribution limit for defined contribution plans is increasing from $56,000 to $57,000.
  • The annual compensation limit used to calculate contributions is increasing from $280,000 to $285,000.
  • The limitation on the annual benefit under a defined benefit plan is increasing from $225,000 to $230,000. (For a participant who separated from service before January 1, 2020, the limitation for defined benefit plans under Section 415(b)(1)(B) can be computed by multiplying the participant's compensation limitation, as adjusted through 2019, by 1.0176.)
  • The dollar limit used in the definition of "key employee" in a top-heavy retirement plan is increasing from $180,000 to $185,000.
  • The dollar limit used in the definition of "highly compensated employee" is increasing from $125,000 to $130,000. 
The table below displays the 2019 and 2020 limits for a host of tax breaks:
 
401(k) Plan Limits for Plan Year
2019 Limit
2020 Limit
401(k) Elective Deferral Limit1
$19,000
$19,500
Catch-Up Contribution2
$6,000
$6,500
Defined Contribution Dollar Limit
$56,000
$57,000
Compensation Limit3
$280,000
$285,000
Highly Compensated Employee Income Limit
$125,000
$130,000
Key Employee Officer Limit
$180,000
$185,000
Non-401(k) Limits
 
 
403(b) Elective Deferral Limit1
$19,000
$19,500
Defined Benefit Dollar Limit
$225,000
$230,000
457 Employee Deferral Limit
$19,000
$19,500

SEP and SIMPLE IRA Limits
2019 Limit
2020 Limit
SEP Minimum Compensation
$600
$600
SEP Maximum Compensation
$280,000
$285,000
SIMPLE Contribution Limit
$13,000
$13,500
SIMPLE Catch-Up Contribution2
$3,000
$3,000
IRA and Roth Limits
 
 
IRA and Roth Contribution Limit
$6,000
$6,000
Catch-Up Contribution 2
$1,000
$1,000

1 Employee deferrals to all 401(k) and 403(b) plans must be aggregated for purposes of this limit.
2 Contributors must be age 50 or older during the calendar year.
3 All compensation from a single employer (including all members of a controlled group) must be aggregated for purposes of this limit.
 
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult a tax preparer, professional tax advisor, and/or a lawyer.

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Sincerely,

John J. Higgins, CFP®, AIF®, CFS®
Managing Partner

 

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