What Is the 401(k) Max Contribution You Can Make for 2020?

The 401(k) max contribution you can make for 2020 is different than previous years due to the CARES Act.


Aug. 31 2020, Updated 7:46 a.m. ET

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Saving for retirement isn't always easy. In times of economic hardship, the idea of putting needed funds away for the future can seem frustrating, even though it's necessary. Still, you will be glad that you had the foresight to save those funds. If you have a 401(k), saving can actually be a breeze. 

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Determining how much to contribute to your 401(k) can be a difficult decision. Because 401(k) contributions are tax-deductible, many economic factors are used to determine the contribution limits. Exactly how much you are allowed to contribute can vary from year to year. 

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How much can I contribute to my 401(k)?

As with most transactions overseen by the IRS, 401(k)s and other retirement accounts are regulated by a slew of complexities that govern their use. The rules limit their use and contributions. The IRS tends to adjust the regulations based on the economy, so they change every few years.

What is the 401(k) max contribution for 2020?

In November 2019, the IRS announced that the contribution limits were higher for 2020. Employees who participate in 401(k), 403(b), and most 457 plans can now contribute $19,500. Combined employer and employee contribution limits increased to $57,000. If you’re over the age of 50, the limit is $6,500.

The limits increased by $500 for individuals and seniors and $1,000 for combined employer and employee contributions. 

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Why are there contribution limits?

Your contributions to 401(k)s and other retirement savings plans are limited by the IRS. The limits aren't arbitrary, as some people might have guessed. Contribution limits are put in place to prevent discrimination. Higher paid workers don't benefit any more than the average worker in terms of tax advantage.

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Even people who are considered to be highly compensated employees (HCE), which means they make more money, might actually be subject to more stringent contribution limits. They can't benefit unfairly from the tax benefits afforded by 401(k) plans. 

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How does the CARES Act affect your 401(k) contributions?

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was created to assist Americans with the unprecedented financial fallout from the COVID-19 pandemic. One of the plan's provisions is that it makes it easier to withdraw funds from certain tax-advantaged retirement accounts — in this case, your 401(k).

The changes are temporary. However, while they are in place, they eliminate tax penalties on certain early withdrawals of up to $10,000 from eligible retirement plans. Also, they relax some of the more stringent rules on loans that you might take in order to withdraw from certain types of accounts.  

Who is eligible for the CARES Act provisions?

Not everyone can take advantage of these early distributions. Only individuals with a valid COVID-19 related reason can access their retirement funds early. The qualifications include: 

  • If you, a spouse or dependent is diagnosed with COVID-19.
  • If you have experienced a layoff, furlough, reduction in hours, or inability to work due to COVID-19. 
  • If you don't have childcare because of COVID-19.

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