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Home>Daily Capital>Retirement Planning>401k Contribution Limits for 2020

401k Contribution Limits for 2020

Looking for a bigger tax break in 2020? If you participate in a 401k plan, you are in luck. Contribution limits for 401k plans have been raised for 2020, giving you the opportunity to shelter more of your income from taxes. Even if you can’t afford to take full advantage of the higher 2020 401k contribution limits, this is a good time to revisit your retirement-saving strategy to take as much advantage of your 401k plan as you can.

What are the 401k contribution limits?

Tax deductible contributions to401k plans and other retirement accounts are subject to IRS limits. These limits are given cost-of-living adjustments from time to time, and the IRS has just announced how those adjustments will affect contribution limits for 2020.

The 401k contribution limit for 2020 has been raised for employees who participate in 401k, 403(b), and most 457 plans to $19,500. If you’re over the age of 50 your limit is $26,000.

What is the maximum 401k contribution for 2020?

Employer matching contributions don’t count toward this limit, but there is a limit for employee and employer contributions combined: Either 100% of your salary or $57,000 ($63,500 if you’re over 50), whichever comes first.

Limits for highly compensated employees

If you earn a high salary, you may be considered a highly compensated employee (HCE), subject to more stringent contribution limits. To prevent wealthier employees from benefiting unfairly from the tax benefits of 401(k) plans, the IRS uses the ADP test to ensure that employees of all compensation levels participate proportionately in their companies’ plans.

Contributions in excess

Evaluating your estimated contributions for the year ahead and analyzing your contributions at the end of a calendar year can be very important. If you find that you have contributed over the limit, the IRS requires notification by March 1, 2021 then excess deferrals should be returned to you by April 15, 2021.

How much is the catch-up contribution for 2020?

The 401k catch-up contribution limit for employees age 50 or older in these plans is $6,500 for 2020. That’s the first increase since 2015 when the limit rose to $6,000. Even if you don’t turn 50 until December 31, 2020, you can make the additional $6,500 catch-up contribution for the year.

2019 vs 2020 Contribution Comparison

The chart below shows the rules and limits for defined-contribution 401k, 403(b), and most 457 plans changing for 2020 compared to 2019.

A comparison chart for 2020 and 2019 limits

Maximum employee elective deferral $19,000 $19,500 +$500
Employee catch-up contribution (if age 50 or older by year-end)* $6,000 $6,500 +$500
Defined contribution maximum limit, all sources $56,000 $57,000 +$1,000
Defined contribution maximum limit (if age 50 or older by year end); maximum contribution all sources, plus catch-up $62,000 $63,500 +$1,500
Employee compensation limit for calculating contributions $280,000 $285,000 +$5,000
Key employee’s compensation threshold for nondiscrimination testing $180,000 $180,000 none
Highly compensated employees’ threshold for nondiscrimination testing $125,000 $125,000 none


Remember, your contributions are earmarked for retirement, and because most contributions are made pre-tax, the IRS holds them with a tight grip. In most cases, you’ll owe a 10% penalty and income taxes if you pull the money out before age 59½. But if you make it to that finish line, you’ll have a pot of money that has grown tax-deferred. If you have questions about your 401k plan, or the options within your plan, reach out to your Personal Capital advisor.

How the CARES Act affects your 401k contributions

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) aims to help Americans cope with the unprecedented financial fallout from the COVID-19 outbreak.

Among its provisions, the CARES Act makes it easier to withdraw funds saved in certain tax-advantaged retirement accounts like your 401k and traditional Individual Retirement Accounts (IRAs). These temporary changes eliminate tax penalties on certain early withdrawals and relax rules on loans you can take from some types of accounts.

Let’s take a closer look at the retirement-related provisions in the CARES Act, and see which of them could help you cope with financial stresses stemming from the COVID-19 crisis.

CARES Act eligibility

Not all tax-advantaged retirement account holders can take advantage of the CARES Act’s early distribution and loan provisions. Specifically, the legislation restricts relief to qualified participants with a valid COVID-19 related reason for early access to retirement funds. You’re qualified if:

  • You’re diagnosed with COVID-19
  • Have a spouse or dependent diagnosed with COVID-19
  • Experiencing a layoff, furlough, reduction in hours, or inability to work due to COVID-19
  • Lack of childcare because of COVID-19

Without a valid Coronavirus-related condition, you’ll need to play by the standard rules. But even if you meet one or more of these eligibility requirements, that does not necessarily mean you will be able to access money in your workplace retirement accounts. That’s because the CARES Act does not require employers to follow the new, more permissive withdrawal and loan rules. Ask your plan sponsor first as not all retirement plans will accept the CARES Act provisions for COVID-19 related hardships.

The new CARES Act rules

The CARES Act allows eligible participants in certain tax-advantaged retirement plans — including 401(k)s, 403(b)s, 457s, and Traditional IRAs — to take $100,000 of coronavirus-related distributions from eligible retirement plans to qualified individuals, as well as special rollover rules with respect to such distributions. It also increases the limit on the amount a qualified individual may borrow from an eligible retirement plan (not including an IRA) and permits a plan sponsor to provide qualified individuals up to an additional year to repay their plan loans. Additionally, during the 2020 calendar year you won’t pay the 10% penalty tax the law imposes on most retirement account withdrawals before an account owner is 59 1/2. Note that this is $100,000 in total, per person, no matter how many retirement accounts you have.

In addition, the act suspends the mandatory 20% tax withholding requirement that normally applies to early distributions from a 401k or other workplace retirement plan. (There is no withholding requirement on early withdrawals from IRAs.)

Keep in mind that withholding isn’t a tax, but rather the IRS’s way of ensuring you ultimately pay whatever ordinary income tax you end up owing on withdrawals.

The CARES act gives you extraordinary flexibility to manage the resulting tax liability. You can choose to spread the taxes owed over three years, or pay it all in 2020 if your income (and thus your tax rate) is much lower this year.

Alternatively, the CARES Act gives you up to three years to redeposit the withdrawn money into a retirement account — normally you’d have only 60 days. If you restore the retirement funds within three years, you won’t owe tax until you take distributions in retirement. You may, however, have to file an amended tax return to get back any tax you paid before redepositing the funds into retirement savings.

Should you withdraw funds from your retirement accounts?

The changes to the rules for retirement accounts are an unusual response to an extraordinary situation. The rules have been altered and relaxed in order to give financial flexibility to people when they need it most. But it’s still important to tread carefully, and reach out to your Personal Capital financial advisor on how to make the best decisions for your retirement.

Suggested Next Steps for You

  1. Sign up for Personal Capital’s free financial tools to track your entire portfolio for free, and see your chances for retirement success. On a mobile device? Visit us on the app store!
  2. Consider speaking to a financial advisor about your retirement plan.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Lacey Cobb serves as the Director of Advice Solutions at Personal Capital. She has 10 years of financial industry experience, with a background in portfolio management, trading, research, investment analysis, and financial planning. Prior to Personal Capital, she was the Head of Trading and Research at Polaris Greystone Financial Group, where she managed the portfolio management team and served on the investment committee. She started there as a financial planner and helped grow AUM from $250 million to $1.5 billion. Before that, she worked for State Street as a fund accountant. Lacey graduated from the University of California, Davis, and holds both the Chartered Financial Analyst® designation and Certified Financial Planner™ designation.
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