Earlier, I covered health care, now it's on to another big part of open enrollment: retirement. Although most plans allow changes throughout the calendar year, there may be new and valuable features available to you, so pay attention.
Traditional retirement plans: In 2019, participants in 401(k)s, 403(b)s, 457 plans and the federal government Thrift Savings Plan were able to make a maximum pretax contribution of $19,000, with a bonus catch-up limit of $6,000 for employees 50 and older. For 2020, the contribution limit for employees goes to $19,500. The catch-up contribution limit will be $6,500.
These amounts do not include employer matches. If your plan provider allows for automatic escalation, choose it. By doing so, you can increase your contribution level each year, nearly painlessly. While you're at it, if there is an auto-balancing feature, use that, too — it will keep your allocation in line with your desired target percentages for each holding.
Roth 401(k) plans: Nearly three-quarters of employers offer Roth 401(k)s to plan participants, yet only about 7.5 percent of employees are using them. With a Roth, you make contributions using after-tax dollars and then are able to take tax-free withdrawals at retirement. Roth 401(k)s are great for those who expect their tax brackets to rise in the future and for higher income employees as well, because Roth 401(k)s are not subject to minimum distribution requirements after age 701/2, as long as they are rolled over to a Roth IRA.
Mega backdoor Roth conversions: This is a little complicated, but in a nutshell, a backdoor Roth IRA conversion is a mechanism that allows those with earned income that is too high to qualify for a Roth contribution, to make an after-tax contribution into an IRA and then immediately convert it into a Roth IRA (there are specific rules about this, so you need to be careful, especially if you have other IRA, SEP-IRA or SIMPLE IRA accounts).
The mega backdoor Roth is a supersized backdoor Roth for those who have a 401(k) at work that allows after-tax contributions to get even more money (up to an additional $37,000) into a Roth. The IRS has blessed this strategy, but there are specific steps that you will need to follow to comply.
Your employer has to also offer something called an "in-service rollover" to a Roth IRA or let you move money from the after-tax portion of your plan into the Roth 401(k) part of the plan.
Changes to hardship withdrawals from 401(k), 403(b) and 457 plans: Hardship withdrawals are still limited to specific circumstances, including: (1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee's principal residence that would qualify for the casualty deduction under IRC Section 165.
Next year, the IRS will allow employees to tap both their own contributions as well as their employer match, profit-sharing contributions and investment earnings; you won't have to assume a qualified retirement plan loan before applying for a hardship withdrawal; and you will be able to continue contributing to your plan as soon as you tap the account for the money, instead of being forced to wait six months before restarting. As always, check with your company about specific rules in place for withdrawals.
Jill Schlesinger, CFP, is a CBS News business analyst. She welcomes comments and questions at email@example.com.