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Each year, these limitations are updated by the Treasury Department to account for cost-of-living increases.
For 2020, the contribution threshold for 401(k) accounts rises to $19,500. That’s up from $19,000 in 2019.
Andrew Meadows, senior vice president at Ubiquity Retirement + Savings, told FOX Business that the extra $500 can be really helpful for savers, especially when the benefit of compounding interest is taken into account.
“The goal is ultimately to save as much as possible for retirement,” Meadows said. “An additional $500 per year can be pretty significant, especially for those over 50 years old whose savings needs are more immediate. Increased contribution limits give more autonomy to the saver and can significantly benefit younger savers as well by allowing them to get a head start.”
For IRAs, the limit will remain the same as last year at $6,000. It increased in 2019 for the first time since 2013.
There are also ways Americans older than 50 can increase savings through catch-up contributions, which allows for an extra $6,500 to be put into a 401(k) next year. The catch-up amount for IRAs remains unchanged at $1,000.
The overall limit for a defined contribution plan will increase to $57,000, from $56,000, while it will increase to $230,000 for defined benefit plans.
Typically, experts recommend saving as much as possible in IRAs, 401(k) accounts and other retirement plans.
According to the White House, 38 million Americans in the private sector do not have access to retirement plans through their employers. Workplace plans are a critical way many people can bolster their savings. The administration announced a new rule in July to expand access for workers, particularly those employed by small businesses.
Saving money in retirement accounts may be even more important for workers as a pathway toward assured solvency for Social Security remains in question. Next year, benefits will increase by 1.6 percent, which senior advocacy groups have said is not enough to keep pace with the rising cost of goods and services, including health care and prescription drugs.
As previously reported by FOX Business, a study found that millennials were more likely than older generations to tap their retirement accounts to pay for unrelated expenses like weddings or taking a sabbatical. Withdrawals, however, can be subject to not only taxes, but also to penalties in some cases.