An employee asked to maximize their 401(k) Catch-up contributions. What is a 401(k) Catch-up and what are the 401(k) defined contribution limits for next year?
A 401(k) plan is one of the more popular options for business owners and employees to work toward saving for retirement due to favorable tax deductions and credits, as well as being a great way to attract top talent to your organization. A 401(k) plan allows for employees to deduct a portion of their pay pre-tax or after-tax into a retirement account, often with employer matching contributions.
In addition to normal salary deferrals, almost all 401(k) plans allow for catch-up contributions. 401(k) Catch-up contributions are salary deferral contributions that can be made for those contributing who are 50 years of age or older to allow for additional retirement savings to maximize their retirement contribution beyond the standard annual salary deferral.
Whether you have a pre-tax or an after-tax Roth contribution 401(k) plan, there are maximum compensation and contribution limits for employees that are adjusted annually based on the current cost-of-living.
At present, the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan has been increased from $19,000 to $19,500 for 2020.
The 401(k) Catch-up contribution limit for employees aged 50 and over who participate in these plans has also increased from $6,000 to $6,500 for 2020.
For a complete listing of the various defined contribution plan changes for 2020, refer to this chart that details the 2020 change for 401(k) plan limits.
As we approach the end of 2019, it will be important for you to reconcile each employee’s contributions based on the 2019 plan limits and update your system based on the revised 2020 limits.
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