It's here. The IRS has posted the new income and contribution limits for all types of retirement plans and accounts for 2020. The IRS also covered income and contribution limits for different medical savings accounts.
Many of the income thresholds and contribution limits were raised. Meanwhile, a few stayed the same or changed very little.
Millions of Americans save and accumulate money for retirement using IRAs and qualified plans (or non-qualified plans for highly compensated and key employees). And every year, the IRS updates the income thresholds and contribution limits for a wide variety of retirement and medical savings accounts. This is done to keep pace with inflation.
The changes to contribution limits for retirement plans and other accounts in 2020 are listed as follows:
Defined-benefit plans will also see change in 2020. The limit for defined-benefit plan annual benefits rises from $225,000 in 2019 to $230,000 in 2020.
And what about the income limit for the Saver's Credit (also known as the Retirement Savings Contributions Credit)? The credit for low-income and moderate-income workers is $65,000 for married couples filing jointly, up from $64,000.
For heads of household it is set at $48,750, up from $48,000. And for singles and married individuals filing separately, it's now $32,500, up from $32,000.
Do You Need to Contribute More to Retirement Savings?
If you are 50 years old or older, now is the time for you to take stock of your retirement savings. If need be, start using those catch-up contributions to beef up your portfolio.
You may need to map out what your expenses will be after you stop working in order to get some idea of how much you will need to save. Your projections should include food, shelter, clothing, healthcare, transportation expenses, entertainment and miscellaneous expenses.
Not only that, consider making projections covering various lengths of time, such as for 15, 20, 25, and 30 years. Considering how long you might spend in retirement, up to a 30-year window is ideal. And don't forget to include your Social Security benefits, which you should project if you start taking benefits at age 62, full retirement age, and age 70.
Don’t forget to start creating an idea of what long-term care expenses might cost you. For a starting idea, crunch some numbers over various lengths of time, such as 2, 3, and 4 years.
Other Options for Accumulating Retirement Money
So, how can you tell how much money you will need for retirement? Our “Will You Have Enough Money to Retire?” article addresses this in more detail.
But the bottom-line is your portfolio should be sufficient to support the annual income you personally need for funding your monthly retirement lifestyle and other goals.
Say you are already taking full advantage of workplace retirement plans and IRAs to build up your retirement savings. What are some other sources that you can tap for further accumulation?
A few of those choices might include:
- Brokerage accounts
- Accounts with mutual funds or other fund companies
- Health savings accounts
- Certificates of deposits
- Variable and fixed-type annuities
- Treasuries and bonds
- Money market accounts
What if you are looking for ways to accumulate retirement money on a tax-advantaged basis and that generally more growth potential than many low-interest instruments right now? Then you might look at a fixed index annuity.
How You Can Earn Interest with a Fixed Index Annuity
Fixed index annuities don’t have any limits imposed by the IRS on how much money you can put into them each year.
This type of annuity pays interest based on an underlying financial benchmark. Many index annuity contracts use the Standard & Poor's 500 price index.
When the index rises, you earn interest in the contract based on a portion of that growth for that crediting period. When the index drops, your principal and already-earned interest money merely stay the same. Your contract is credited zero interest for that down period.
You can lose money in an index annuity from index losses in only two ways. One is if your index annuity includes income riders or other add-on benefits that come at an additional fee. If you are credited zero interest for a certain period because the index declined, the fee you paid would put you slightly into the red.
The other time is if you withdraw more money than what is allowed under your contract’s free withdrawal provision or if you completely surrender the contract.
Most index annuities allow contract holders to withdraw 5 or 10 percent of the contract value each year. If you take out more than that, the excess amount can be subject to stiff surrender charges, especially in the first few years after you bought the annuity.
Rev Up Your Retirement
If you like the idea of earning interest with protection against index losses, then an index annuity may offer you more growth potential than a bond or a CD may give. An even more powerful benefit with an index annuity is its ability to pay you a guaranteed lifetime income, regardless of how markets perform.
It provides you with a definite, guaranteed stream of income that you can count on just like Social Security or a pension. If you have additional funds above and beyond what you are saving for retirement, this annuity option can be an excellent complement to your portfolio.
Set Up Your Retirement for Success
At the very least, create projections for what your income and spending needs will be in retirement. Don't hesitate to enlist the help of a qualified financial planner or experienced financial professional if you don't feel comfortable running the numbers yourself.
Many investment advisers, financial advisors, and agents have sophisticated computer programs that can easily project your income and expenses out for any length of time you choose. They can incorporate inflation and other factors that can impact your finances.
An experienced professional can also help you to identify other steps that you may need to take so you are prepared for retirement.
The new numbers published by the IRS will allow many retirement savers to put away a little bit more in 2020. For more information on the new contribution limits and income thresholds, consult your tax advisor or visit the IRS website at www.irs.gov.
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