IRS increases retirement contributions for 2020

Recently, the Internal Revenue Service (IRS) announced that workers contributing to 401(k), 403(b), 457 and the federal government’s Thrift Savings Plans will be able to add up to $19,500 in 2020. Read this blog post to learn more about this increase in retirement contributions.


The IRS said this week that workers contributing to 401(k), 403(b), 457 and the federal government’s Thrift Savings Plans plans can add $19,500 next year, an increase from $19,000 in 2019.

The move could help workers save more for retirement, but it may be inconvenient for employers who’ve already started open enrollment, experts say. Employees are now able to set aside $500 more for retirement.

“Every penny counts when you’re saving for retirement, and the higher contribution limit is definitely going to help,” says Jacob Mattinson, partner at McDermott, Will & Emery, a Chicago-based law firm. “But since companies are in the midst of open enrollment, employers may have to go back in and change the entries for employees who want to contribute the max.”

There are about 27.1 million 401(k) plan participants using roughly 110,794 employer-sponsored 401(k) plans, the Employee Benefit Research Institute says. Ninety-three percent of employers offer a 401(k) plan, and around 74% of companies match workers’ contributions, according to data from the Society for Human Resource Management.

While the vast majority of employers do offer retirement savings plans, employees may still be struggling to sock away money. Around 70% of workers say debt has negatively impacted their ability to save for retirement, EBRI says.

“Thirty-two percent of workers with a major debt problem are not at all confident about their prospects for a financially secure retirement, compared with 5% of workers without a debt problem,” says Craig Copeland, EBRI senior research associate.

The IRS also upped contribution limits on Savings Incentive Match Plan for Employees plans, or SIMPLE retirement accounts, to $13,500 from $13,000. The agency did not change the contribution limits to IRAs, which remain at $6,000 annually.

SOURCE: Hroncich, C. (7 November 2019) "IRS increases retirement contributions for 2020" (Web Blog Post). Retrieved from https://www.benefitnews.com/news/irs-increases-retirement-contributions-for-2020


SIMPLE IRA vs. 401(k): How to Pick the Right Plan

Should you choose a SIMPLE IRA or a 401(k) for retirement saving? There are pros and cons to both types for employers. Read this blog post from NerdWallet for more on these two plan types and how to choose the right one for you.


The decision between a SIMPLE IRA and a 401(k) is, at its core, a choice between simplicity and flexibility for employers.

The aptly named SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees, is the more straightforward of the two options. It’s quick to set up, and ongoing maintenance is easy and inexpensive. But if you have employees, you are required to provide contributions to their accounts. (See our SIMPLE IRA explainer.)

Although a 401(k) plan can be more complex to establish and maintain, it provides higher contribution limits and gives you more flexibility to decide if and how you want to contribute to employee accounts. Another big difference is that you can opt for a Roth version of the plan, whereas the SIMPLE IRA allows no Roth provision.

SIMPLE IRA vs. 401(k)

Here are the need-to-know differences between SIMPLE IRAs and 401(k)s:

SIMPLE IRA

401(k)

Employer eligibility Employers with 100 or fewer employees Any employer with one or more employees
Employee eligibility All employees who have compensation of at
least $5,000 in any prior 2 years, and are reasonably expected to earn at least $5,000 in the current year
All employees at least 21 years old who worked at least 1,000 hours in a previous year
Employer contribution rules
  • Mandatory employer contribution: Either matching contribution of up to 3% of employee's pay or contribution equal to 2% of employee’s compensation, even if employee does not contribute.
  • All contributions vest immediately.
  • Employer contributions deductible on business tax return.
  • Employer contributions are optional.
  • Employee contributions vest immediately. Employer sets vesting schedule for employer contributions.
  • Required proportional contributions for each eligible employee if you contribute for yourself.
  • Employer contributions deductible up to IRS limits.
Contribution limits
  • Employee contribution limit: $13,000; $16,000 for those age 50 or older.
  • No limit on employer matching contribution; if using the 2% contribution based on compensation, employer match allowed on up to $280,000 of salary.
  • Employee contribution limit: $19,000; $25,000 for those age 50 or older.
  • Combined contributions of employee and employer are limited to the lesser of 100% of compensation or $56,000 ($62,000 if age 50 or older).
Administrative responsibilities No annual tax filing requirements; annual plan details must be sent to employees Subject to annual compliance testing to ensure plan does not favor highly compensated employees
Fees Minimal account fees Varies by plan
Investment options Any investments available through the financial institution that holds accounts Investment selection curated by employer and plan administrator
Pros
  • Requires minimal administrative management.
  • Lower setup and maintenance costs.
  • Participants may be allowed to choose account provider.
  • Higher contribution limits.
  • Roth 401(k) option available.
  • Employer contribution is optional.
  • Vesting schedule set by employer.
  • Plan may permit loans.
Cons
  • Mandatory employer contribution.
  • No Roth option.
  • Lower contribution limits.
  • 25% penalty on distributions made before age 59½ and within the first two years of participation in the plan.
  • No loans allowed.
  • Employer cannot maintain any other type of retirement plan.
  • Higher setup costs and administrative requirements.
  • Plan fees can be high, especially for small businesses.
More details What Is a SIMPLE IRA? What Is a 401(k)?

SOURCE: IRS.gov

SIMPLE IRA or 401(k): How to decide

Startup costs and ease of setup often dictate the choice between retirement savings plans. But there are other factors to consider as well. To help decide which plan is best, answer the following questions:

Why are you setting up a retirement plan?

For many small-business owners, the answer is that they’re trying to maximize their own retirement savings dollars. If that’s the case, contribution limits should weigh heavily in your decision. For high earners especially, the higher contribution limit of the 401(k) makes it a more attractive choice than a SIMPLE IRA.

How important is it to offer the Roth option?

As mentioned earlier, the IRS allows employers to offer a Roth 401(k). (Quick reminder: A Roth 401(k) is funded with after-tax contributions in exchange for tax-free distributions in retirement.) There is no Roth version of the SIMPLE IRA. The account is subject to many of the same rules as a traditional IRA: Contributions reduce your taxable income for the year, but distributions in retirement are taxed as ordinary income. That said, the IRS allows participants to save in both a SIMPLE IRA and a Roth IRA at the same time.
Will you need to adjust employer contributions?
Although a nice perk to attract potential employees, employer contributions are not required of companies that offer 401(k) plans. You also have the freedom to set vesting terms, which allows you to require employees remain employed by you for a set time before taking ownership of your contributions to their accounts. Employer contributions to employee SIMPLE IRA accounts are mandatory, though you can choose between two matching arrangements dictated by the IRS. Contributions to a SIMPLE IRA are immediately 100% vested.

You have other choices

If you are self-employed or a small-business owner, SIMPLE IRAs and 401(k) plans aren’t your only options. There are a variety of retirement plans at your disposal.

For example, if you run a business with no employees, a solo 401(k) is worth considering. As the employer and (your own) employee, you’re allowed to contribute a total of up to $56,000 in 2019 (or $62,000 if you’re age 50 or older).

A SEP IRA also has a high contribution limit for business owners and self-employed individuals, though there is no catch-up contribution for savers 50 or older. The drawbacks: Like the SIMPLE IRA, a SEP requires employers to contribute to eligible employee accounts, and no Roth version is allowed.

We’ve laid out the pros and cons for these and other retirement plan options for the self-employed.

SOURCE: Yochim, D. (8 June 2019) "SIMPLE IRA vs. 401(k): How to Pick the Right Plan" (Web Blog Post). Retrieved from https://www.nerdwallet.com/blog/investing/simple-ira-vs-401k-comparison-how-to-pick-the-right-plan/


Tax the rich – and limit retirement contributions? It doesn’t add up

Source: http://eba.benefitnews.com
By: Aaron Friedman

Tax the rich!  Raise their rates! Limit their deductions! That seems to be the populist mantra. It’s perpetuated in the press, and there’s some indication that the general public seems to support the idea. Now middle class workers with higher than average incomes seem to be caught up in discussions defining those that are “rich.”

As this applies to tax-exempt organizations, we’re talking about hospital administrators, educators, executive directors of local community and other charitable organizations – people who generally earn a better than average income, yet by no stretch of the imagination do their incomes compare to Warren Buffett’s. And when it comes to the impact on their employers’ retirement plans, shouldn’t the tax structure support retirement readiness for those who have dedicated their careers to giving back to their communities?

For example, current conventional belief supports that people should be saving 11-15% of their pay, including matching contributions, every year throughout their working careers in order to save enough to be retirement ready. Assuming a 3% match, and therefore an average of a 12% annual savings need, anyone earning less than approximately $146,000 annually should be fine. (12% of $146,000 is approximately the $17,500 annual limit.)

However, what about the person making $250,000 per year? Contributing a maximum of $17,500 only equates to 7% of pay. When the match is included it’s still short of the target necessary for retirement readiness — yet as the numbers show, these limitations currently in place put these people at a disadvantage for retirement savings. In addition, one of the alternatives under consideration is limiting qualified plan contributions even further.

Fortunately, there is something that can be done. Private (non-governmental) tax-exempt organizations can maintain a deferred compensation plan under section 457 of the internal revenue code. These 457 plans allow for additional benefits for a select group of management or highly compensated individuals, over and above the limitations in their 403(b) or 401(k) plan.

457 plans are an excellent tool for tax-exempt organizations to be able to recruit, retain, reward and retire key personnel. In other words, they help meet the goals of the organization (which in turn, serves their communities) while empowering key employees to meet their financial goals.

Last summer, Sen. Tom Harkin released a report called “The Retirement Crisis and a Plan to Solve It.”  One premise of the report is that there is inadequate savings for Baby Boomers and Gen Xers to pay for basic expenses in retirement. The report footnotes studies that show this ”retirement income gap” is between $4.3 and $6.6 trillion, but as we see above, there is already pressure in regular tax rules that make it difficult for higher-than-average income people to achieve retirement readiness.

As Congress continues the tax debate, it’s important that we consider what’s good for the long term, and helping all plan participants achieve retirement readiness should be of paramount importance. Tax reform and retirement policy should not be at odds.