What’s the Maximum Contribution for a 401(k) and IRAs in 2020?

The journey to retirement is anything but a straight and narrow path. As pensions gradually become a thing of the past (just 13 percent of private-sector workers participate in pension plans), many workers are looking for ways to grow their money ahead of retirement. 

There are multiple ways to save for your golden years, like investing in a regular brokerage account to build your nest egg over the long term. But taking advantage of tax-friendly investment accounts is what puts real muscle behind your efforts. (The magic of compound interest plus the tax breaks along the way really do add up.) Try our compound interest calculator to see for yourself! 

There are, of course, contribution limits. Here’s how much you can kick into an Individual Retirement Account (IRA) and a 401(k) in 2020.

What’s the maximum contribution I can make to an IRA in 2020? 

Traditional IRAs

Unlike a Roth IRA, which we’ll break down in a moment, contributions to a traditional IRA may be tax-deductible. All this means is that you might be able to lower your taxable income and, in turn, reduce your tax bill. How much you can write off depends on your income level and whether or not you or your spouse have access to an employer-sponsored retirement plan.

With a traditional IRA, you will be taxed on the withdrawals you take during retirement. And tapping a traditional IRA before age 59 ½ will also result in a 10 percent penalty (on top of taxes). However, one of the biggest perks is that you don’t have to pay annual taxes on earnings as your investment grows, so that’s a definite win. Account holders must begin taking minimum withdrawals once they turn 72, under the new SECURE Act. 

The contribution limits are staying the same from 2019 to 2020—up to $6,000 combined between any traditional and Roth IRAs you have. Folks who are 50 or older can contribute an additional $1,000.

Roth IRAs

Roth IRAs, which are funded with after-tax dollars, are structured a little differently. While you won’t enjoy a tax deduction today, your investments grow tax-free—and you’ll pay zero taxes when you make withdrawals in retirement. Another benefit is that you can tap this account whenever you want with no penalty, as long as you’ve had it for at least five years and don’t touch your investment earnings before age 59 ½.

There are income levels to contend with. To max out your Roth IRA in 2020, your modified adjusted gross income has to be under $124,000. Married couples filing jointly can earn up to $196,000. That’s up from $122,000 and $193,000 in 2019. Again, your contributions can’t exceed $6,000 across all traditional and Roth IRA accounts; $7,000 for those who are 50 or older.

SEP IRAs

Simple Employee Pension (SEP) IRAs were designed with small business owners and self-employed people, including freelancers, in mind. Thanks to its super-high contribution limit, the SEP IRA lets you sock a lot of money away for retirement. For 2020, you can put in either $57,000 or 25 percent of your compensation—whichever is less. That’s a bit more than the $56,000 limit for 2019. (The 25 percent compensation limit caps at $285,000, up from $280,000 in the previous year.)

Another benefit of the SEP IRA is that you can deduct most or all of your contributions, though you’ll be taxed when you pull money out in retirement. And if you dip into it prior to age 59 ½, you’ll be hit with the 10 percent penalty mentioned earlier. Minimum withdrawals also begin at 72. 

Side note: Any employees who work for you also qualify for SEP IRAs if they meet certain IRS requirements. If you do have any eligible employees, just keep in mind that you’ll have to contribute to their plans as well.

What’s the maximum contribution I can make to an employer-sponsored retirement plan in 2020?

401(k)s

The 401(k) goes hand in hand with retirement saving, and with good reason. This employer-sponsored plan allows workers to set aside pre-tax dollars that grow tax-free until they’re ready to retire. Contributions are tax-deductible—and many employers will match some or all of what you put in, which essentially translates to free money.

You do have to pay taxes sooner or later. With a 401(k), you’ll be taxed on the money you take out in retirement at your then-current tax rate. And similar to other accounts we’ve mentioned, taking distributions prior to 59 ½ will result in a 10 percent early withdrawal penalty. You must also begin taking minimum withdrawals at 72. 

One other notable detail about the 401(k) is that you can roll it over into a new account whenever you leave your employer. This might be directly into the 401(k) at your new job or into an IRA. (Acorns allows you to roll over your 401(k) into one of three IRAs. Learn more about Acorns Later.) The idea is to keep up investing momentum with plans that have the lowest fee structure.

Now let’s talk contribution limits. In 2020, you can put in $19,500. Employees who are 50 or older can kick in an extra $6,500. Each of these numbers got a $500 boost from 2019.

403(b)s

You can think of a 403(b) as a close cousin of the 401(k). They’re structured the same way, and have the same contribution limits. The main difference is that 403(b)s are designed specifically for government and nonprofit employees. Another key distinction has to do with fees: 403(b)s are notorious for tacking on higher investment fees. If this type of account is available to you at work, run the numbers to see if you’d be better off investing in an IRA.

When it comes to making the most out of your nest egg, don’t be afraid to leverage multiple tax-advantaged retirement accounts. None of us can predict the future, and spreading out your money in this way provides more options for retirement income when the time comes. Higher contribution limits in 2020 can help you get there a little faster.