Here's How Much You Can Put Into a Retirement Account

What are the limits for the current tax year?

Senior couple looking out to sea

David Lees / Iconica / Getty Images

There are a handful of different accounts that help you save for retirement. Regardless of which type of retirement account you choose, the fastest way to grow your nest egg is to contribute as much as possible every year.

The IRS contribution limits for 401(k) and IRA accounts are indexed to inflation, so they increase every year or so. Limits are recalculated in October every year.

It's important to know how much you can contribute every year so that you can make sufficient progress toward your retirement savings goals. Here's how much you can put into popular retirement accounts this year.

401(k) Contribution Limits

The most popular​ retirement account is the 401(k), mainly because it is offered by many employers who sometimes match a certain percentage of contributions. Money is often contributed before taxes are deducted from your paycheck, so you’ll pay taxes years down the road when you withdraw that money.

The 2020 contribution limit for your 401(k)s is $19,500. Those 50 or older can contribute an additional $6,500.

Pre-tax contributions are beneficial because they lower your taxable income and allow you to build the value of your 401(k) account more quickly. For example, an employee who earns $50,000 annually and contributes 5% of her income to her 401(k) will end up contributing $2,500 to her retirement account over the course of a year, lowering her taxable income by that same amount.

If you’re self-employed, and your business has no common-law employees other than your spouse, you can set up an individual 401(k) for yourself, sometimes referred to as a solo 401(k). You have a choice of contributing either pre-tax dollars or after-tax dollars to a solo 401(k). If you want to contribute after-tax dollars, your account will be called a Roth 401(k). Since you already have paid income tax on the money being contributed, you won’t have to pay taxes when you withdraw the money in retirement.

IRA Contribution Limits

There are four main types of Individual Retirement Accounts, (IRAs): a SIMPLE IRA, SEP-IRA, Traditional IRA, or Roth IRA.

Anytime you hear the word “Roth,” it indicates after-tax dollars.

Traditional IRAs are funded with pre-tax dollars, while Roth IRAs are funded with after-tax money. You’re allowed to contribute a maximum of $6,000 in 2020, to a combination of your Traditional IRA and Roth IRA accounts. If you’re 50 or older, you can chip in an extra $1,000 on top of that limit.

In other words, your yearly contribution to your Roth IRA plus your Traditional IRA can’t be greater than $6,000 if you’re 49 or younger, or $7,000 if you’re 50 or older.

For example:

  • If Sally, 25, contributes $6,000 to her Roth IRA, she is not allowed to contribute anything to her Traditional IRA in that same year.
  • John, 57, could contribute $2,500 to his Roth IRA and $4,500 to his Traditional IRA.
  • Benny, 44, could contribute $5,999 to his Roth IRA and $1 to his Traditional IRA.

You can establish Traditional or Roth IRAs by yourself, but only your employer can set up an SEP-IRA for you.

SEP stands for simplified employee pension, and SEP-IRAs are typically used by self-employed individuals or small business owners.

Employers can contribute up to 25% of your wages to an SEP-IRA for a maximum of $57,000, as of 2020 ($56,000 for tax year 2019). So, employers can contribute 25% of wages for employees earning up to $285,000 in 2020 ($280,000 in 2019). For employees earning more than that, the contribution limit is set at $57,000 for 2020.

SIMPLE IRAs are used by small businesses with 100 or fewer employees. SIMPLE stands for savings incentive match plan for employees and contributions are made with pre-tax dollars. The contribution limit, as of 2020, is $13,500 ($13,000 for tax year 2020). Investors 50 or older can contribute up to an additional $3,000.

Article Sources