Retirement insights from a Colorado PERA perspective

Legislation & Governance

IRS Announces Changes for 2020

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Employees will be able to contribute up to $19,500 in pre-tax wages to their 401(k) plans next year thanks to an increase in the IRS limits that also covers 403(b) plans, most 457 plans, and other tax-advantaged savings vehicles. Each year, the Secretary of the Treasury is required to adjust limits based on cost-of-living changes.

Many financial experts suggest building up multiple sources of income during your working years, even if you are in a pension plan. While pensions provide steady, reliable income, it can help to have access to a 401(k) for additional monthly spending needs as well as a source of cash for larger one-time expenses, such as an unexpected health care bill or purchasing a home.

In addition to the higher contribution
limit, the IRS announced the following changes:

  • The IRS allows people over 50 to contribute an additional amount to a 401(k) or 457, a rule known as the “catch-up contribution.” In 2020, that limit increases to $6,500 from $6,000.
  • Eligible low- and middle-income taxpayers who make contributions to accounts such as an IRA or 401(k) can file for a nonrefundable tax credit worth up to $2,000 ($4,000 for joint filers). The income limit for this Saver’s Credit increased to $65,000 for joint filers, $48,750 for heads of households, and $32,500 for singles.
  • Health Savings Account (HSA) contribution limits will go up for calendar year 2020. Anyone with a high deductible health plan (HDHP) can open a HSA and save money for health expenses in the future. These accounts have the ultimate tax advantage: As long as money is withdrawn for qualified medical expenses, these dollars are never taxed. Contributions are pre-tax, investment gains or interest are tax-free, and withdrawals aren’t taxed. The contribution limit for an individual is $3,550 for 2020, and, if a family is on an HDHP, their total contribution limit is $7,100. PERA retirees enrolled in Kaiser Permanente’s HDHP plan can enroll in an HSA with their preferred financial institution to take advantage of these savings (PERA does not offer HSA accounts).

Options
available to PERA members

Any active PERA member (currently working for a PERA employer) can enroll in a 401(k) through PERA. Some members can also enroll in a 457 if their employer has chosen to offer one. Those who have access to both types of accounts don’t need to choose between the two—a person may contribute to both at the same time. All PERAPlus accounts offer the same low-cost investment options.

These accounts allow members to contribute pre-tax dollars from their paychecks. When a person begins taking withdrawals in retirement, the amount withdrawn is taxed. Some people would prefer to make contributions to these accounts after they’ve already paid taxes, which would allow for tax-free withdrawals in the future. This arrangement is called a Roth contribution. Some employers allow employees to make Roth contributions to their 401(k) or 457 accounts directly from their paychecks. People whose employers don’t allow them to make Roth contributions directly from their paychecks can still take advantage of the Roth rules by doing an in-plan Roth conversion.

Find more information about these two types of retirement accounts here.

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