Retirement Savings Plan Contribution Limits for 2021 by Joanie B. Stein, CPA
Posted on February 03, 2021
There is good and bad news for retirement savers in 2021. While the IRS’s annual inflation adjustments will allow more individuals to qualify to contribute to traditional IRAs and Roth IRAs, the maximum amount that can be contributed to employer-sponsored 401(k) and 403(b) plans remains unchanged from last year. If you are already retired or planning to do so in 2021, a meager 1.3 percent annual cost of living adjustment to Social Security benefits will yield a scant $20 more in your pocket each month.
The job losses and business closures resulting from the COVID-19 pandemic have called attention to the general lack of retirement readiness among most Americans. Those who work for companies that sponsor defined-contribution retirement plans may not have been funding their 401(k)s with the maximum allowable amount, while others, such as independent contractors and sole proprietors without access to workplace plans may not have been taking advantage of other retirement savings tools available to them.
401(k) Plan Contribution Limits
The maximum amount you may contribute to a 401(k) or 403(b) plan in 2021 is $19,500, unchanged from last year. If you are age 50 or older, you may make an additional $6,500 catch-up contribution. By funding these plans with elective salary deferrals of pre-tax dollars, you may receive a tax deduction in the years you make the contributions. In contrast, you will be taxed on withdrawals taken in retirement, after you reach age 59½.
IRA and Roth IRA Contribution Limits
The annual contribution limits to traditional IRAs and Roth IRAs also remain unchanged in 2021, topping off at $6,000, plus an addition $1,000 in catch-up contributions if you are age 50 and older. Generally, contributions to Roth IRAs are not tax deductible, but withdrawals taken in retirement, after age 59½, generally are tax free. By contrast, contributions to traditional IRAs may qualify for tax deductions based on your income, marital status and the access you and/or a spouse have to a workplace retirement plan. However, withdrawals from traditional IRAs in retirement are taxed as income.
What has changed in 2021 are higher income ranges you may use to determine your eligibility for claiming tax deductions for your traditional IRA contribution this year. The deduction phase-out ranges for 2021 are as follows:
- $66,000 to $76,000 for single taxpayers covered by a workplace retirement plan;
- $105,000 to $125,000 for married couples filing jointly in which the spouse making the IRA contribution is covered by a workplace retirement plan
- $198,000 and $208,000 for married couples filing jointly in which the spouse making the IRA contribution is not covered by a workplace retirement plan but is married to someone who is covered
To qualify to contribute to a Roth IRA in 2021, your modified adjusted gross income must be fall within the following ranges:
- $125,000 to $140,000 for single taxpayers and heads of household; and
- $198,000 to $208,000 for married couples, filing joint tax returns
More Options for Small Business Owners
Self-employed taxpayers and sole proprietors can make tax-deductible contributions of as much as $58,000 to a SEP IRA in 2021, a $1,000 increase from last year. The actual amount of the contribution is based on a percentage of your self-employment income if you are a sole proprietor or partnerships or your compensation if your business is structured as an S corporation.
Alternatively, owners of small businesses, including corporations, with up to 100 employees may establish Simple IRAs and make a tax-deductible contribution of up to $13,500 of their self-employment income to those plans in 2021. If you are 50 or older, you can contribute an additional $3,000. You are also permitted to contribute to the plan as the employer. Like a traditional IRA, earnings in a Simple IRA grow tax-deferred and withdrawals taken in retirement are taxed as ordinary income.
Any discussion about retirement planning during the COVID-19 health crisis is not complete without mentioning the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which allowed individuals to tap into the their retirement plan savings without incurring early withdrawal penalties. Funds taken as distributions from 401(k) or IRAs must be repaid back to those plans within three years; the repayment period for hardship loans is five years.
Determining which type of retirement plan(s) are best suited to help you reach your long-term financial needs should include an assessment of your unique circumstances under the guidance of your CPA and tax advisors.
About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she works with individuals and closely-held businesses to implement sound strategies that are intended to preserve wealth and improve tax-efficiency. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at email@example.com.