Every year, the Internal Revenue Service (IRS) considers the cost of living changes in the United States when adjusting tax laws. These changes are called the cost of living adjustments or COLA.
COLA is made to many of the tax laws, but one area of particular interest is the amount taxpayers can contribute to retirement plans, IRA, and benefits under a pension plan. Since the amount contributed to these forms of savings plans is untaxed, the IRS must place limits on them, or people would contribute all of their money to avoid paying taxes.
As you’re planning your contributions in 2020, consider the following changes.
You can contribute up to $6,000 to IRAs. If you have missed your contribution for 2019 or 2018, you can contribute an additional $1,000.
Joint filers can contribute up to $104,000. Single or Head of Households can contribute up to $65,000.
This form of IRA for self-employed individuals helps people save for retirement. The minimum amount to contribute to a SEP is $600 and the maximum is $57,000 in a year.
This IRA is one in which employees and employers can contribute to, and it’s set up by employers. The maximum contribution is $13,500 in 2020, which is a $500 increase since 2019. For those who missed the contribution in 2019, an additional $3,000 can be contributed.
The annual compensation, as in your base salary and employer contributions, may not exceed $285,000 in 2020. Each year for the last two years, it has increased by $5,000.
Elective deferrals or the amount contributed to a plan by the employer at the employee’s election has increased $500 from last year for a maximum contribution of $19,500.
Catch-up contributions can be up to $6,500.
Contribution limits cannot exceed $57,000.
ESOP, a type of employee benefit plan similar to a profit-sharing plan, has a maximum account balance of $1,510,000 and $230,000 for determining the lengthening of the general five-year distribution period.
Other contributions and limits taxpayers may need to know about include:
● HCE Threshold - $130,000
● Defined Benefit Limits - $230,000
● Key Employee - $185,000
● 457 Elective Defferals - $19,500
● Control Employee - $115,000
● Control Employee - $230,000
● Taxable Wage Base - $137,700