At Allworth, we know you probably have much better things to do with your time than trying to keep track of changes to Social Security, Medicare, and other retirement-related matters that occur from year-to-year.
Besides, that’s why we’re here.
Your team is constantly reviewing updates and modifications to rules and regulations currently in place. What’s in store for 2020? We’ve got you covered with a brief roundup.
Retirement accounts
If you’re still saving for retirement, you’ll be able to contribute more to your retirement accounts this year (in most cases). The contribution limit for 401(k)s, 403(b)s, most 457 plans, and the federal government’s Thrift Savings Plan has increased by $500 to $19,500 for anyone younger than 50. If you’re 50 or older, you can save up to $26,000.
Have a SEP IRA or Solo 401(k)? You can now save up to $57,000 ($63,500 if you’re 50 or older).
The limit for a SIMPLE account has also increased, so it now sits at $13,500 ($16,500 if you’re 50 or older).
However, IRA and Roth IRA limits are staying the same at a combined limit of $6,000 (the catch-up contribution limit if you’re 50 or older also remains unchanged at $1,000).
Social Security
There are four big changes to Social Security in 2020: a cost-of-living adjustment, a change to the payroll tax earnings cap, an increase in the maximum monthly benefit, and an increase to the earnings limit. Let’s take a more detailed look at each.
COLA
Every year since 1975, the Social Security Administration determines whether or not a cost-of-living adjustment (also known as a COLA) is warranted using the Consumer Price Index for Urban Wage Earners and Clerical Workers. The goal of a COLA is to ensure Social Security benefits are keeping pace with inflation.
Here’s a look back at the COLAs for the past 5 years:[i]
- 2019: 2.8%
- 2018: 2.0%
- 2017: 0.3%
- 2016: 0.0%
- 2015: 1.7%
As you can see, the COLA amount varies from year-to-year and, occasionally (such as in 2016), there is no increase at all.
In 2020, the COLA is increasing by 1.6%. With the average monthly benefit around $1,479, this means the average recipient will see about a $24 ‘raise’ each month.
Payroll tax earnings cap
Previously in 2019, anyone earning more than $132,900 for the year (which is about 6% of the working population covered by Social Security[ii]) did not have to pay Social Security taxes on any income over this threshold. In 2020, this threshold is now $137,700.
Basically, if you’re a high-income earner, you’ll be paying more in Social Security taxes this year.
If we put real numbers to this change, here’s what it looks like (assuming you made more than $132,900 last year and will make more than $137,700 this year):[iii]
- If you’re an employee, you’ll pay about $300 more in Social Security taxes for the year
- If you’re self-employed, you’ll pay about $600 more
(It’s important to note that these calculations do not include Medicare taxes)
Maximum monthly benefit limit
If you’ve worked hard over the last 35 years to hit that aforementioned payroll tax earnings cap, there’s a good chance you could earn Social Security’s maximum monthly benefit.
In 2020, this limit is now $3,011 a month at your Full Retirement Age (up from $2,861 in 2019). For reference, this is more than double the average monthly benefit. And if you wait until age 70 to start claiming, the limit is higher (around $3,790).
Check your ‘my Social Security’ account to get a more specific estimate of your monthly benefit.
Earnings limit
Thinking of working while claiming Social Security? You’ll now be able to earn a little bit more before an ‘earnings test’ kicks in.
In 2020, assuming you’ve not yet hit your Full Retirement Age, you’re allowed to earn up to $18,240 in wages before your Social Security benefit will be reduced. This is up from last year’s limit of $17,640.
If you’re working in the year in which you reach your Full Retirement Age, the wage limit is now $48,600 (an increase of $1,680 from last year).
Note: Once you hit your Full Retirement Age you can simultaneously work and claim Social Security without any benefit reduction.
Medicare
Remember that Social Security COLA we mentioned earlier? Don’t get too excited about it. Because what one hand gives the other taketh away: this year, Medicare’s standard Part B premium will increase to $144.60 a month. This is an increase of $9.10 from 2019. And the higher your income, the higher this premium.
So, in reality, the average Social Security recipient is actually only netting about $15 more a month.
The Part B deductible is now also higher, coming in at $198.
Retirement planning
Congress passed the bi-partisan SECURE Act (“Setting Every Community Up for Retirement Enhancement”) as part of a broader spending bill at the end of 2019. And with the President’s signature on December 20th, it became our country’s most significant retirement legislation enacted into law in more than a decade.
The new law now means:
- The age at which you’re forced to take Required Minimum Distributions (RMDs) from traditional IRAs and 401(k)s is now age 72 (previously age 70 ½)
- Anyone over the age of 70 ½ can continue saving in a traditional IRA
- You’ll likely see more annuity options inside 401(k) plans
- Any non-spousal beneficiary of an IRA (or 401(k)) will need to draw down the account within a 10-year window (previously, a beneficiary could stretch the withdrawals over their lifetime)
- Small business owners should be able to more easily ban together to offer 401(k) plans
- Long-time part-time workers are now eligible to participate in a 401(k) (starting in 2021)
- New parents can make penalty-free withdrawals from a retirement account to help with child costs (up to $5,000 per parent)
If you have any questions about how the SECURE Act will impact your specific situation, be sure to contact your Allworth advisor.
More legislation we’re watching
Everything we’ve mentioned so far are changes that are set in stone. But there are also a few other ideas floating around the halls of Congress that could greatly impact your retirement – we just don’t know yet if they’ll actually happen. Here are two brief outlines.
The Health Savings for Seniors Act
- Bi-partisan bill
- Introduced in the House in July 2019
- Would allow Medicare beneficiaries to contribute to a Health Savings Account (HSA)
- Would eliminate the ability to pay for Medicare premiums with an HSA
- Would create a penalty for using funds for non-medical expenses at age 65 and older (currently no penalty)
The Social Security 2100 Act
In just 14 years, there will be fewer workers paying into Social Security to cover an increasing number of beneficiaries. If no changes are made to the program by this point, beneficiaries will receive just 77% of their promised benefit.[iv]
What could fix this deficit? Congress could:
- Raise the full retirement age
- Implement “means testing”
- Increase the payroll tax earnings cap
- Eliminate the payroll tax earnings cap (meaning all wages would be taxed)
- Increase the payroll tax rate
- Tax more (or all) of a benefit (currently, at least 15% of everyone’s benefit is tax-free)
- Recalculate the cost-of-living adjustments
- Cover all newly-hired state and government workers
- End spousal benefits
- Institute some combination of all these ideas
The Social Security 2100 Act, which the Committee for a Responsible Federal Budget claims would extend the program’s solvency through the year 2100, actually implements a few of these tactics:
- Introduced in the House and Senate in January 2019
- Would give recipients a 2% raise
- Would use the Consumer Price Index for the Elderly to determine COLAs
- Would allow the payroll tax earnings cap to stay in place, but then re-introduce a tax once wages rise above $400,000
- Would raise the income limit when calculating taxation of benefits
- Would eliminate the 50% taxation point while keeping the 85% taxation point
- Would increase the payroll tax rate to 14.8% (from 12.4%) gradually over the next 23 years
Rest assured, your Allworth team is keeping an eye on these bills and any other legislation that has the potential to alter the course of your retirement.
Here’s to a happy and healthy 2020!