Higher 401(k) limits, new IRA rules, COVID-19 distributions and more…
Picking up where we left off in our Part 1 discussion, here are a few more changes to keep in mind for this year.
Waiver of 10% Withdrawal Penalty
The 10% penalty for early withdrawals from IRAs and retirement accounts is being waived for 2020, subject to a maximum allowable withdrawal of $100,000.
Withdrawal amounts are taxable over three years, but taxpayers can recontribute the withdrawn funds into their retirement accounts for three years without affecting retirement account caps.
Required Minimum Distributions
For 2020, individuals expected to take Required Minimum Distributions will not be required to withdraw that amount from their IRA or retirement plan.
This includes your first RMD if you reached age 70 ½ during 2019.
Higher 401(k) Limits
- If your employer has a 401(k) plan, you can invest up to $19,000 for 2019 and $19,500 for 2020
- And if you’re over 50, you can contribute up to $6,000 more in 2019 and $6,500 in 2020.
- The contribution limit for SIMPLE retirement accounts for 2019 is $13,000 and will be raised to $13,500 in 2020.
New IRA Rules
Last year, we could not make new contributions to IRAs after we reached the age of 70 ½. But starting this year, we can keep contributing to a traditional IRA beyond that age.
Income ranges for determining eligibility to make deductible contributions to traditional IRAs and to contribute to Roth IRAs will all increase for 2020.
The extension of the tax-filing deadline to July 15th enables one to contribute to a traditional IRA or HSA for 2019 and possibly get a tax deduction for the 2019 tax year.
New Use for 529 Plan Savings
529 savings plans now allow funds to be used for qualifying educational expenses at any level, not just for college.
Capital Gains
Capital gains tax rates are either 0%, 15% or 20% for most assets held for more than a year.
Capital gains tax rates on most assets held for less than a year correspond to ordinary income tax brackets (10%, 12%, 22%, 24%, 32%, 35% or 37%).
Deductions, Credits and Relief
- The standard deduction for married filing jointly is $24,400 and will rise to $24,800 for tax year 2020
- For single taxpayers and married individuals filing separately, the standard deduction is $12,200 and it will rise to $12,400 for 2020
- For heads of households, the standard deduction is $18,350 and it will rise to $18,650 for 2020
- There are no personal exemptions in the 2019 tax year
- The Child Tax Credit is $2,000 per qualifying child for single filers and married couples with no upper limit
- Mortgage interest is still deductible up to $750,000 in principal
- The Affordable Care Act’s individual mandate penalty tax is eliminated
- The student loan interest deduction allows you to deduct up to $2,500 from your taxable income if you paid interest on student loans in 2019
The Tax Code is Huge
Politicians and late-night comedians routinely rant that the federal tax code is too long—and they’re not wrong. At over 2,500 pages, that’s more than double the length of War and Peace, written by Leo Tolstoy.
A lot of people get help with their taxes because taxes are complicated. But while you might work with a tax preparer, make sure you also consult with your financial advisor to determine how the new tax changes might impact you and your family. We’re just a quick phone call away, so please don’t hesitate to contact us with your questions.
