The IRS has released its cost-of-living adjustments to the limits on retirement plan contributions for 2021, and the reviews are mixed. While more individuals qualify to make tax deductible contributions to IRAs in 2021, the dollar limit on those and other qualified retirement account contributions remain unchanged from 2020.
Workers who participate in employer-sponsored 401(k), 403(b), 457 plans may contribute up to $19,500 in pre-tax dollars to these plans in 2021, the same amount as in 2020. Similarly, the additional catch-up contribution limit for savers age 50 or older also remains unchanged at $6,500.
The deadline for employees to make plan contributions via salary deferral is December 31 of the tax year. However, business owners with Schedule C income ultimately have until the date of their personal tax-filing deadline to physically deposit the deferred salary into their accounts. The tax filing deadline also applies to the employer contributions to their plans.
For 2021, the maximum amount taxpayers can contribute to an IRA or Roth IRA remains at $6,000, plus an additional $1,000 for qualifying savers age 50 and older.
What has changed in 2021 are the income ranges taxpayers must use to determine their eligibility for claiming tax deductions. The amount of a deduction may be reduced based on a taxpayer’s access to a retirement plan through his or her employer or a spouse’s employer as well as his or her filing status and modified adjusted gross income (AGI).
The income phase-out ranges for taxpayers making contributions to a Roth IRA also increase in 2021 to between $125,000 and $140,000 for individual taxpayers and heads of households and $198,000 to $208,000 for married couples filing jointly. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
If a taxpayer earns too much income to contribute to a Roth IRA in 2021, he or she can instead make a contributions to a traditional IRA today and later convert it to a Roth for the benefit of tax-free distributions after they reach age 59 ½ and have owned the Roth IRA account for at least five years. While this “back-door IRA” is legal under the current tax law and the provisions of the Tax Cuts and Jobs Act (TCJA), it is possible that a new presidential administration will eliminate the availability of this strategy.
In general, IRA contributions must be made by the April tax-filing deadline for the tax year of the contribution. Therefore, contributions intended for the 2020 tax year must be made by April 15, 2021, barring any postponements to the filing deadline. This additional amount of time allows individuals to assess their tax liabilities at the end of the year and determine whether it is more beneficial to claim the deduction for that year by contributing to a traditional IRA or paying taxes now on a contributions to a Roth IRA, for which future withdrawals in retirement will be tax free.
Self-employed taxpayers with solo 401(k)s and SEP IRAs may save an additional $1,000 in those plans in 2021 for a total of $58,000. That amount is based on the amount the taxpayer can contribute as an employer as a percentage of his or her salary, subject to income limitations.
The contributions qualifying taxpayers can make to SIMPLE retirement accounts in 2021 remains unchanged at $13,500.
About the Author: Sean Deviney is a CFP®* professional, a retirement plan advisor and a director with Provenance Wealth Advisors (PWA), an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors + CPAs. For more information, call (954) 712- 8888 or email firstname.lastname@example.org.
Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Sean Deviney is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional. The information contained in this report has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Investments mentioned may not be suitable for all investors. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
* Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.