IRS increases 401(k) contribution limits

Employees will be able to sock away more money into their 401(k) next year.

The IRS announced Wednesday that employees in 401(k) plans will be able to contribute up to $19,500 in 2020, a $500 increase from the 2019 limit. It’s part of the agency’s annual inflation adjustments.

The $19,500 limit also apply to 403(b) plans, most 457 plans, and the federal government’s Thrift Savings Plan.

The annual contribution limit for IRAs, however, will remain unchanged at $6,000.

Other limits included in the IRS notice include:

• Effective Jan. 1, the limitation on the annual benefit under a defined benefit plan will increase to $230,000 from $225,000
• The limitation for defined contribution plans will increase to $57,000 from $56,000

The updated contribution limits come at a time of growth for retirement savings among employees. According to Fidelity Investments, the average 401(k) contribution rate is now 8.8%, not including the employer match. That’s nearly a full percentage point higher than a decade ago and the highest percentage ever. On top of that, employers are on average contributing another 4.7%, bringing the total contribution to 13.5%.

The increase is a “great indication of how focused Americans are getting about saving for retirement,” Kevin Barry, president of workplace investing at Fidelity, told HRE in August, noting that increasing contribution rates by even 1% can make “a big difference” in employees’ long-term retirement savings.

“What may seem like a small amount today can have a significant impact on your account balance in 10 or 20 years,” he said.