Hey everyone, it’s Finance Fridays again. Today is just going to be a short post about highlighting the “2020 Changes” regarding retirement contributions and taxes.
2020 Changes
First things first, you can read all about it direct from the IRS:
2020 Taxes (44 pages!)
However, I will try to break down what I think is important as simply as possible.
401k/403b/457 Contributions
401k/403b/457 contributions will increase from $19,000 in 2019 to $19,500.
Catch-up contributions (for 50 and older) has also increased from $6,000 in 2019 to $6,500 in 2020.
IRA plans, either traditional or Roth will remain at $6000 (or $7000 for catch-up contributions). So no changes to your annual Backdoor Roth IRA.
Health Savings Accounts (HSA)
There will be a slight increase from $3500 to $3550 for individuals or $7000 to $7100 for families.
Estate and Gift Taxes
The lifetime gift and estate tax exemption per individual was $11.4 million in 2019, but will increase slightly to $11.58 million in 2020.
Annual gift exclusion will remain at $15,000.
Income Taxes
Basically they increased the ranges up a little compared to 2019. Long story short, if your salary doesn’t change at all, you may pay a little less in taxes this year. If your salary went up a little this year, you’ll probably pay the same or more. Essentially, this was just an inflation adjustment.
There is a lot of other tax stuff but one to note is:
There is now a slightly higher standard deduction, $12,400 for individuals, $18,650 for heads of households, and $24,800 for married filing jointly. It was previously $12,200, $18,350, and $24,400 respectively.
It’s not a huge increase, but hey, at least it’s something.
Anything else?
Yea, as an aside, I think 2020 will be finally be the year when I start putting serious money into paying down our loans. It is at this point that we are going to start carefully paying down extra principal on our loans on a quarterly basis — or just pay off the higher interest loans in one click if we have enough money.
Our aggressive plan is to have them gone in the next 3 years. Hopefully by the end of 2033, but it may take until 2025 for a more conservative estimate. However, I do want to clarify that they probably won’t be completely gone. The loans that are sitting around 1% or 2% I don’t really care about. Even the 2.5% ones I’m not too worried about.
While my wife wants them all gone, I don’t see a reason to pay off loans that are at or below the level of inflation. While there is a psychological component to “not having any debt” — in terms of efficiency, those loans are at a lower interest rate than our house. It would make more sense to simply make more payments on the house and/or utilize build a taxable account. I am going to try to convince her that when only those low interest loans are left , we can consider the loans “paid off”. Then the low interest loans would just continue on their course to the original 20 year payoff plan.
TL;DR
Small changes for 2020.
Just remember to change your 401k/403b/457 contributions to maximize to the new limit of $19,500 and catch-up contributions too (if applicable).
No changes to Backdoor Roth IRA.
There probably won’t be a dramatic change in your taxes for 2020, barring significant changes in income. Stay the course.
2020 will be (finally) be the year of aggressively paying down our student loans.
-Sensei
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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