In 2020, anyone with a workplace retirement plan they contribute to can pony up even more money. For 2020, if you’re younger than 50 you can pile as much as $19,500 into a 401(k), 403(b) or similar defined-contribution plan. That’s up from $19,000. If you’re 50 or older, the 2020 limit is $26,000.

According to Vanguard’s analysis of 401(k) plans it administers, less than four in 10 participants who made at least $100,000 are estimated to have contributed the maximum in 2018, and only 3% of participants with income between $50,000 and $100,000 hit the 401(k) contribution limit.

Still, even if you don’t max out, a workplace plan holds a big advantage over saving in an IRA. For 2020, there is no inflation adjustment for IRA contributions. The limits remain at $6,000 if you’re under 50 and $7,000 if you’re at least 50.

For those curious about the disparity between the two retirement savings accounts, Aron Szapiro at Morningstar, explained that the 401(k) limits have to be demonstrably higher to entice employers to sponsor a workplace plan. “Policymakers believe it is necessary to maintain this unfairness because extra tax incentives induce employers to offer a retirement plan when they otherwise might not,” Szapiro wrote.

That explicit unfairness has broad impact. According to federal data, just 60% of workers have access to a workplace retirement plan they can contribute to. For the other 40%, some may have a pension, but most do not. So their only tax-advantaged way to save for retirement is through an IRA, with its unfair lower contribution limits.

If you’re dependent on IRA savings, here’s how to wring out the most value:

• Set up automatic deposits from a checking account into an IRA account. Discount brokerages provide this service for free.

• Consider a Roth IRA if the notion of tax-free withdrawals in retirement appeals. There are two types of IRAs: traditional and Roth. A Roth IRA provides no upfront tax deduction — you contribute money that has already been taxed — but in retirement, every dollar you withdraw is tax free.

• Take advantage of a spousal IRA. If you are married and one spouse is not earning income, they can still have an IRA. All the IRS cares about is that the household’s earned income is at least equal to the total both spouses contribute to an IRA.

• Self-employed or have a side gig? Use a SEP-IRA. If you are self-employed or you do any gig work, you are eligible for a SEP-IRA. In 2020, you can contribute 25% of your net earnings up to $57,000.


Carla Fried writes for