News

18
Nov

IRA and Retirement Plan Limits for 2020

IRA contribution limits

new year aheadThe maximum amount you can contribute to a traditional IRA or a Roth IRA in 2020 is $6,000 (or 100% of your earned income, if less), unchanged from 2019. The maximum catch-up contribution for those age 50 or older remains at $1,000. You can contribute to both a traditional IRA and a Roth IRA in 2020, but your total contributions can’t exceed these annual limits.

Traditional IRA income limits

If you are not covered by an employer retirement plan, your contributions to a traditional IRA are generally fully tax deductible. For those who are covered by an employer plan, the income limits for determining the deductibility of traditional IRA contributions in 2020 have increased. If your filing status is single or head of household, you can fully deduct your IRA contribution up to $6,000 ($7,000 if you are age 50 or older) in 2020 if your modified adjusted gross income (MAGI) is $65,000 or less (up from $64,000 in 2019). If you’re married and filing a joint return, you can fully deduct up to $6,000 ($7,000 if you are age 50 or older) in 2020 if your MAGI is $104,000 or less (up from $103,000 in 2019).

Traditional IRA Limits

If you’re not covered by an employer plan but your spouse is, and you file a joint return, your deduction is limited if your MAGI is $196,000 to $206,000 (up from $193,000 to $203,000 in 2019), and eliminated if your MAGI exceeds $206,000 (up from $203,000 in 2019).

Roth IRA income limits

The income limits for determining how much you can contribute to a Roth IRA have also increased for 2020. If your filing status is single or head of household, you can contribute the full $6,000 ($7,000 if you are age 50 or older) to a Roth IRA if your MAGI is $124,000 or less (up from $122,000 in 2019). And if you’re married and filing a joint return, you can make a full contribution if your MAGI is $196,000 or less (up from $193,000 in 2019). (Again, contributions can’t exceed 100% of your earned income.)

Roth IRA Limits

Employer retirement plans

Most of the significant employer retirement plan limits for 2020 have also increased. The maximum amount you can contribute (your “elective deferrals”) to a 401(k) plan is $19,500 in 2020 (up from $19,000 in 2019). This limit also applies to 403(b) and 457(b) plans, as well as the Federal Thrift Plan. If you’re age 50 or older, you can also make catch-up contributions of up to $6,500 to these plans in 2020 (up from $6,000 in 2019). (Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.)

If you participate in more than one retirement plan, your total elective deferrals can’t exceed the annual limit ($19,500 in 2020 plus any applicable catch-up contributions). Deferrals to 401(k) plans, 403(b) plans, and SIMPLE plans are included in this aggregate limit, but deferrals to Section 457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can defer the full dollar limit to each plan — a total of $39,000 in 2020 (plus any catch-up contributions).

The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) is $13,500 in 2020 (up from $13,000 in 2019), and the catch-up limit for those age 50 or older remains at $3,000.

Note: Contributions can’t exceed 100% of your income.

The maximum amount that can be allocated to your account in a defined contribution plan (for example, a 401(k) plan or profit-sharing plan) in 2020 is $57,000 (up from $56,000 in 2019) plus age 50 catch-up contributions. (This includes both your contributions and your employer’s contributions. Special rules apply if your employer sponsors more than one retirement plan.)

Finally, the maximum amount of compensation that can be taken into account in determining benefits for most plans in 2020 is $285,000 (up from $280,000 in 2019), and the dollar threshold for determining highly compensated employees (when 2020 is the look-back year) is $130,000 (up from $125,000 when 2019 is the look-back year).

11
Nov

Manufacturing Slowdown: What Does It Mean for the Economy?

ManufacturingIn September 2019, the Institute for Supply Management (ISM) Purchasing Managers Index (PMI), which measures a wide variety of manufacturing data, fell to 47.8%, the lowest level since June 2009.1

A reading below 50% generally means that manufacturing activity is contracting. The August reading of 49.1% had signaled the beginning of a contraction, and the drop in September suggested that the contraction was not only continuing but accelerating. The index rose slightly to 48.3% in October, but this indicated the third consecutive month of contraction.2 Nearly two-thirds of economists in a Wall Street Journal poll conducted in early October said the manufacturing sector was already in recession, defined as two or more quarters of negative growth.3

Leading indicator

The PMI — which tracks changes in production, new orders, employment, supplier deliveries, and inventories — is considered a leading economic indicator that may predict the future direction of the broader economy. Manufacturing contractions have often preceded economic recessions, but the structure of the U.S. economy has changed in recent decades, with services carrying much greater weight than manufacturing. The last time the manufacturing sector contracted, during the “industrial recession” in 2015 and 2016, the services sector helped to maintain continued growth in the broader economy.4

That may occur this time as well, but there are mixed signals from the services sector. In September, the ISM Non-Manufacturing Index (NMI) dropped suddenly to its lowest point in three years: 52.6%. The index bounced back in October to 54.7%, marking the 117th consecutive month of service sector expansion. Even so, these recent readings were well below the 12-month high of 60.4% in November 2018.5

Global weakness and trade tensions

The slump in U.S. manufacturing is being driven by a variety of factors, including a weakening global economy, the strong dollar, and escalating tariffs on U.S. and imported goods.

In October 2019, the International Monetary Fund (IMF) downgraded its forecast for 2019 global growth to 3.0%, the lowest level since 2008-09. The IMF pointed to trade tensions and a slowdown in global manufacturing as two of the primary reasons for the weakening outlook.6 Put simply, a weaker world economy shrinks the global market for U.S. manufacturers.

The strong dollar, which makes U.S. goods more expensive overseas, reflects the strength of the U.S. financial system in relation to the rest of the world and is unlikely to change in the near future.7 Tariffs, however, are a more volatile and immediate issue.

Originally intended to protect U.S. manufacturers, tariffs have been effective for some industries. But the overall impact so far has been negative due to rising costs for raw materials and retaliatory tariffs on U.S. exports. For example, tariffs on foreign steel, which were first levied in March 2018, enabled U.S. steel manufacturers to set higher prices. But higher prices increased costs for other U.S. manufacturers that use steel in their products.8 Retaliatory tariffs by Canada and Mexico contributed to a $650 million drop in U.S. steel exports in 2018 and a $1 billion increase in the steel trade deficit.9 (In May 2019, the United States removed steel tariffs on Canada and Mexico, which dropped retaliatory tariffs in return.)10

U.S. manufacturers in every industry may pay higher prices for imported materials used to produce their products. An average of 22% of “intermediate inputs” (raw materials, semi-finished products, etc., used in the manufacturing process) come from abroad.11 Tariffs paid by U.S. manufacturers on these inputs must be absorbed — cutting into profits — and/or passed on to the consumer, which may reduce consumer demand.

Jobs in ManufacturingThe uncertainty factor

Along with specific effects of the tariffs, manufacturers and other global businesses have been hamstrung by trade policy uncertainty, which makes it difficult to adapt to changing conditions and commit to investment. A recent Federal Reserve study estimated that trade policy uncertainty will lead to a cumulative 1% reduction in global economic output through 2020.12

On October 11, 2019, President Trump announced that he would delay further tariff hikes on China — including an increased tariff on intermediate goods scheduled for October 15 — while the two sides attempt to negotiate a limited deal. Although a deal would be welcomed by most interested parties, past potential deals have collapsed, and it’s uncertain how any agreement might affect the $400 billion in tariffs on Chinese goods already in place, or the tariffs on goods from other countries.13

Will the slowdown spread?

Manufacturing accounts for only 11% of U.S. gross domestic product (GDP) and 8.5% of non-farm employment, a big change from 50 years ago when it accounted for about 25% of both categories.14-15 However, the manufacturing sector’s economic influence extends beyond the production of goods to the transportation, warehousing, and retail networks that move products from the factory to U.S. consumers. The final output of U.S.-made goods accounts for about 30% of GDP.16

Even so, a continued slowdown in manufacturing is unlikely to throw the U.S. economy into recession as long as unemployment remains low and consumer spending remains high. The key to both of these may depend on the continued strength of the services sector, which employs the vast majority of U.S. workers. It remains to be seen whether the service economy will stay strong in the face of the global headwinds that are holding back manufacturing.

1-2, 5) Institute for Supply Management, 2019
3) The Wall Street Journal, October 10, 2019
4) The New York Times, July 28, 2019
6) International Monetary Fund, 2019
7) National Review, August 22, 2019
8) Bloomberg, March 24, 2019
9) The Wall Street Journal, March 18, 2019
10) Bloomberg, May 17, 2019
11) Federal Reserve Bank of St. Louis, 2018
12) Federal Reserve, 2019
13) USA Today, October 11, 2019
14) U.S. Bureau of Economic Analysis, 2019
15-16) The Wall Street Journal, October 1, 2019
4
Nov

Could a HSA Help Strengthen Your Retirement Plan?

HSABy one estimate, a 65-year-old couple who retire in 2019 may need about $300,000 in savings to pay their health-care expenses in retirement. This includes premiums for Medicare Parts B and D, supplemental (Medigap) insurance, and median out-of-pocket prescription drug expenses, but not other health expenses such as long-term care, dental care, and eye care.1

Health expenses are rising faster than inflation, and even insured workers are finding it harder to pay their portion from year to year (premiums, copays, coinsurance, and deductibles), much less plan for the future. The stakes are even higher for early retirees (younger than 65) and self-employed individuals who must purchase their own health insurance and bear the entire cost themselves.

A health savings account (HSA) is a tax-advantaged account linked with a high-deductible health plan (HDHP). They work together to help you cover your current health-care costs and also save for your future needs.

Tax trifecta

HSAs offer several tax benefits to help encourage diligent saving.

  1. Pre-tax contributions can often be made through an employer via payroll deduction, or you can make contributions yourself and take a tax deduction whether you itemize or not. Either way, HSA contributions reduce your adjusted gross income and federal income tax for the current year.
  2. Any interest or investment earnings compound on a tax-deferred basis inside the HSA.
  3. Withdrawals are tax-free if the money is spent on qualified medical expenses. When HSA money is spent on anything other than qualified medical expenses, withdrawals are taxed as ordinary income, and an onerous 20% penalty applies to taxpayers under age 65.

Depending on your state, HSA contributions and earnings may or may not be subject to state taxes.

Contribution rules

The maximum HSA contribution limit in 2020 is $3,550 for individual coverage or $7,100 for family coverage. This annual limit applies to all contributions, including those made by you, your family members, or your employer. You can contribute an additional $1,000 starting the year you turn 55. Once you sign up for Medicare, you can no longer contribute to an HSA.

Funds roll over from year to year and are portable, which means they are yours to keep. When HSA balances reach a certain threshold, you can steer the funds into a paired account with investment options similar to those offered in a 401(k). You can make 2019 contributions up to April 15, 2020.

Pros and cons

HDHPs are designed to help control health costs. HSA owners are forced to pay attention to prices, so they may select lower-cost providers and be more likely to avoid unnecessary spending. On the other hand, some people with HDHPs might be reluctant to seek care when they need it, because they don’t want to spend the money in their account. A high deductible can make it difficult to pay for a costly medical procedure, especially if there hasn’t been much time to build up an HSA balance.

To be eligible to establish or contribute to an HSA, you must be enrolled in a qualifying high-deductible health plan — an HDHP with a deductible of at least $1,400 for individuals, $2,800 for families in 2020. Workers who are offered HDHPs (as a choice or their only option) or purchase their own insurance often face much higher deductibles. In 2019, the average deductible for employer-provided HDHPs was $2,486 for individual coverage and $4,779 for family coverage.2

Qualifying HDHPs also have out-of-pocket maximums, above which the insurer pays all costs. In 2020, the upper limit is $6,900 for individual coverage or $13,800 for family coverage, but plans may have lower caps. This feature could help you budget accordingly for a worst-case scenario.

Premiums are typically lower for HDHPs than traditional health plans. Until the deductible is satisfied, members usually pay more up-front for services such as physician visits, surgery, and prescriptions, but typically receive the insurer’s negotiated discounts.

Some preventive care, such as routine physicals and cancer screenings, may be covered without being subject to the deductible. Under new IRS guidance issued in July 2019, the list of preventive care benefits that HDHPs may provide was expanded to include certain medications and treatments for chronic illnesses such as asthma, diabetes, depression, heart disease, and kidney disease. Providing this coverage encourages patients to seek care before problems become more serious and costly.

Retirement strategy

Another HSA benefit is that account funds not needed for health expenses are available for any other purpose after you reach age 65. Although HSA funds cannot be used to pay regular health plan premiums, they can be used for Medicare premiums and qualified long-term care insurance premiums and services that you may need later in life.

If you can afford to fund your HSA generously while working, some of those dollars could be left untouched to accumulate for many years. You could even pay current medical expenses out of pocket and preserve your HSA assets for use during retirement. But save your receipts in case you have an unexpected cash crunch. You can reimburse yourself for eligible expenses at any time.

Compare carefully

Open enrollment is the time of year when employers typically introduce changes to their benefit offerings. If you purchase your own health insurance, you might also be presented with new options for 2020. The bottom line is that choosing and using your health plan carefully could help you save money. If you choose an HDHP, make sure to contribute the premium dollars you are saving to your HSA, and more if you can.

Before you sign up for a specific plan, read the policy information and look closely for any coverage gaps or policy exclusions, consider the extent to which your prescription drugs are covered, estimate your potential out-of-pocket costs based on last year’s usage, and check to see whether your doctors are in the insurer’s network.

1) Employee Benefit Research Institute, 2019
2) Kaiser Family Foundation, 2019