The Internal Revenue Service (IRS) has announced that contribution limits for 401(k)s, IRAs, 403(b) accounts, most 457 plans, the government Thrift Savings Plans, and other qualified retirement accounts will stay the same in 2021. Those who participate in these plans can put aside the same amount as they did in 2020. In addition, the income qualifications for a Roth IRA and the requirements to have your contributions to a traditional IRA be tax-deductible and to claim the Saver's Credit have been updated for 2021.
Here's a summary of the contribution and limitation levels for 2021.
- Each year, the IRS evaluates and updates qualified retirement account contribution limits.
- The IRS makes adjustments based on increases in the cost of living as measured by inflation.
- Increases do not occur every year, so check with IRS guidelines, which are typically released in October before the new year.
Individual Retirement Accounts (IRAs)
- What you can contribute for 2020: $6,000
- What you can contribute for 2021: $6,000
Tax-Advantaged Employer Retirement Plans
Annual contributions to your 401(k), 403(b), most 457 plans, and Thrift Savings Plan remain the same for 2021:
- What you can contribute for 2020: $19,500
- What you can contribute for 2021: $19,500
Traditional IRA Contributions: Earn More and Still Deduct
Generally, contributions to a traditional IRA are tax-deductible in the year that you make the contribution. However, if you or your spouse (if you file taxes as married filing jointly) are covered by a retirement plan at work, your contributions may not be deductible, depending on your income.
Today's good news: The amount you can earn and still deduct these contributions has gone up for 2021. Here are the new phase-out ranges, from the IRS announcement of these changes:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is $66,000 to $76,000, up from $65,000 to $75,000.
- For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $105,000 to $125,000, up from $104,000 to $124,000.
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $198,000 and $208,000, up from $196,000 and $206,000.
More Taxpayers Qualify for a Roth IRA
There are many benefits to saving your money in a Roth IRA instead of a traditional one—especially that your distributions at retirement are completely tax-free and that there are no required minimum distributions (RMDs). However, there are income limitations on who qualifies to have a Roth. These have also been significantly loosened for 2020. Here's how the IRS describes it:
The income phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household, up from $124,000 to $139,000. For married couples filing jointly, the income phase-out range is $198,000 to $208,000. 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.
You Can Earn More and Take the Saver's Credit
The Saver’s Tax Credit (also known as the Retirement Savings Contributions Credit) allows low- and moderate-income workers to take a tax credit of up to $1,000 for contributions to a traditional or Roth IRA, or to an employer-sponsored 401(k), 403(b), SIMPLE, SEP, or governmental 457 plan.
Here's how it's changed, according to the IRS: The 2021 income limit for taking this credit rose to $66,000 for married couples filing jointly, up from $65,000; $49,500 for heads of household; and $33,000 for singles and married individuals filing separately.
Other Changes to Qualified Retirement Plans
If you are covered by compensation limits or elective deferrals, are a key employee, or may be defined as a highly compensated employee, and have an employee stock ownership plan, a SEP or SIMPLE IRA plan, or any other retirement provisions covered by the IRS Code, the provisions that cover you may also have changed.
These determinations are delineated in IRS Notice 2018-83. Consult your tax advisor for further details.
If you are age 50 or over, you can increase your contributions to help you save as retirement gets nearer. The extra amounts you can put aside for retirement did not change for 2021.
Catch-up contributions are still:
- $1,000 more per year for a traditional or Roth IRA
- $6,500 more for a 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan
The Bottom Line
These changes should help taxpayers save even more for retirement in 2021. The 2020 limits will prevail for the taxes that you file by July 15, 2021. Remember that you can contribute to your 2020 traditional or Roth IRA as late as the July 2021 tax deadline.