The Solo 401(k) contribution limit will increase in 2020, allowing employees to contribute significantly more than they did in 2019.
The Treasury department announced new 2020 retirement account figures adjusted for inflation. Contribution limits for 401(k) qualified retirement plans are up, traditional IRA and Self-Directed IRA contribution limits will stay the same. Almost all other retirement account contribution limits are up for 2020.
401(k) Contribution Limit Increase in 2020
The Internal Revenue Service (IRS) announced today that the contribution limits for 401(k) employees, including the Solo 401(k), will increase from 2019. The 401(k) plan contribution will increase to $19,500 next year.
These changes came along with other announcements today in Notice 2019-59, which can be found on the IRS website. Highlights of the recent changes also include employee contributions for 403(b), most 457 retirement plans and the federal government’s Thrift Savings Plan, which all increase to $19,500 in 2020.
Next year’s 401(k) contribution limit increase will be up $500 from the 2019 contribution limits for the 401(k) plan. SIMPLE retirement accounts will also increase by $500, up to $13,500 in 2020.
Catch-Up Contribution Limit 2020 Increase
The catch-up contribution for plan participants age 50 and over will increase from $6,000 to $6,500 for all previously mentioned plans.
It will increase by $1,500 for the Solo 401(k).
Solo 401(k) 2020 Contribution Increase
Individuals under age 50 who participate in the Solo 401(k) plan will be able to contribute up to $57,000 in 2020. This increase is up $1,000 from the current 2019 contribution limit of $56,000.
Individuals age 50 and over will be able to make a catch-up contribution of $6,500 for a maximum contribution of $63,500.
As an employee, you have the option to make the Elective Deferral, also known as an employee contribution. For 2020, the Solo 401(k) maximum contribution limit for the elective deferral is $19,500 if you’re 50 and under. This is an increase from the 2019 contribution of $19,000.
The elective deferral contribution if you’re 50 and older is $26,000, up $1,000 from 2019. Employee deferral contributions can be made in pre-tax or Roth.
The Solo 401(k) Profit Sharing Contribution is also known as the Employer Contribution. For 2020, you can make a contribution of $37,500 whether you are under or over 50 years old. Unlike the employee deferral contribution, which is a dollar-for-dollar contribution, the solo 401(k) plan employer contribution is based on a percentage of the income.
Total Limit for Couples
Your spouse can participate in the Solo 401(k) Plan if he/she earns compensation from the business. He or she can make separate and equal contributions. This increases the annual contribution to $114,000 (under 50) or $127,000 (over 50) that a couple can make for 2020.
Catch-up Contribution Advantage
If you are over age 50, you are eligible to make catch-up contributions, which will allow you to claim significant tax deductions on your annual tax bill. Catch-up contributions are beneficial for individuals who are slightly behind on building their retirement nest egg.
As soon as you turn 50, it’s important to make financial adjustments in order to reach the maximum and save as much as the government permits.
If you generate self-employment or you are a sole-proprietor, you can establish the Solo 401(k) plan and make even higher contributions. The high contribution limits of the Solo 401(k) make it an attractive retirement vehicle for individuals who started saving for retirement late in the game.
You can find this information in greater detail in Notice 2019-59 or the IRS News Release.
Did you know?
The Solo 401k plan is the most popular retirement plan for the self-employed. For those who own a business where they are the only employee, or where their spouse also works, the Solo 401k plan can help you save for retirement by contributing as the employer and employee.