All You Need to Know About 401(k)s: Limits, Withdrawals, and Rollovers in 2020

On November 6, the IRS released its 2020 contribution limits for workplace retirement plans, including 401(k) plans, 403(b) plans, most 457 plans and the federal government's Thrift Savings Plan, and there were a few notable changes from this year’s limits:

• Effective January 1, 2020, employees can make elective, pre-tax or Roth contributions up to $19,500 to their own workplace retirement accounts (up from $19,000 in 2019).
• Individuals who are at least age 50 in 2020 may set aside an extra $6,500 in the form of pre-tax or Roth contributions (up from $6,000 in 2019) within their workplace retirement accounts. Employers often refer to this as a “catch-up provision” in their plan literature and announcements.
• The total amount, including both employee and employer contributions, that can be contributed to a workplace retirement plan in 2020 cannot exceed $57,000. For employees who are eligible to make catch-up contributions to the plan next year, the limit is adjusted up to $63,500. Rollovers, if permitted by a workplace retirement plan, are not subject to these contribution limits.
• The annual compensation limit—or the consideration amount on which employee and employer contributions are based—was increased to $285,000 (up from $280,000 in 2019).

Also, effective January 1, 2020, plan participants will have fewer restrictions relative to hardship withdrawals (typically distributions from retirement accounts before age 59 ½ for emergencies). For example, participants will no longer be required to take a plan loan before making a hardship withdrawal, nor suspend elective contributions for 6 months following a hardship withdrawal.

Hardship withdrawals are still subject to income taxes and a stiff 10% penalty for plan participants under the age of 59 ½, though. And there’s also long-term cost for dipping into workplace retirement plans too often: Deloitte estimates that American workers will lose nearly $2 trillion in potential retirement savings over the next 10 years due to early withdrawals. 

Many American workers cannot afford to lose the benefits of potential savings and cumulative earnings over time. According to Employee Benefit Research Institute’s 2019 Retirement Confidence Survey, roughly 8 out of 10 American workers have less than $250,000 saved for retirement.

Still, in conjunction with the new contribution limits, there are some distinctive opportunities for plan participants to move the needle in a positive direction in 2020. Here are three strategies to consider:

• Don’t leave money on the table. Nearly one out of four American workers miss out on their full 401(k) matching opportunity—an average of $1,336 of potentially free money per person—each year because they do not contribute enough to the plan.
• Get extra credit for your plan contributions. The Retirement Savings Contributions Credit (also known as the Saver’s Credit) is a tax break for individuals with modest incomes who contribute to a retirement account. In 2020, the credit will be worth up to 50% of the first $2,000 saved for retirement.
• Know your own number. While it is a good rule-of-thumb to replace 60 to 80% of your work pay in retirement, what’s the real number that will meet your specific needs? To what extent will your plan contributions in 2020 support your personal retirement goal? Having a defined retirement goal helps shape your overall plan—and evidently offers some wellness benefits, too. According to the 2019 BlackRock DC Pulse Survey, 9 out of 10 plan participants agreed that having enough saved for retirement ranked second to good health relative to factors that led to their wellbeing.

To learn more about how the new contribution limits fit into your own financial plan, reach out to a CFP® professional in your area today.