Retirement Contribution Limits For 2021

If you are like many people, you are thinking about what may be ahead as you near retirement.  Whether you are within a few years of retirement or still have decades to go, contributing as much as possible to your retirement plans can pay off big in the years ahead.  But as you know, the contributions to various plans can change from year to year, so it's important to know what you can or cannot do regarding your 401(k), IRA, or other plan.  As we now get 2021 underway, here are the contribution limits for various plans of which you should be aware.

401(k)

As an employee who participates in your employer's 401(k), 403(b), 457, or the Thrift Savings Plan offered by the federal government, your annual contribution limit will be $19,500, just as it was in 2020.  Also, if you are an employee who is age 50 or older and want to take advantage of the 401(k) Catch-Up contribution, this will also stay the same as it was in 2020, coming in at $6,500.  For this contribution, it's important to remember that even if you will not be reaching age 50 until December 31, 2021, you are still allowed to make this $6,500 catch-up contribution.  In addition, remember that you can make changes to your 401(k) at any point during the year, not just during the open enrollment period.

Solo 401(k) and SEP IRA

Should you be part of the group that contains self-employed individuals and small business owners, you likely have set up a Solo 401(k) or a SEP IRA.  If you have, you will be able to contribute a bit more in 2021 than in 2020.  Starting in 2021, the contribution limit increases from $57,000 to $58,000.  Remember, this amount is based on a percentage of your salary that you are allowed to contribute as an employer.  Also, the compensation limit used to determine the savings calculation has also changed in 2021, increasing $5,000 from $285,000 to $290,000.

Individual Retirement Accounts

Some of the most popular and effective ways to save for retirement, Individual Retirement Accounts have actually not changed from 2020 to 2021.  Whether your IRA is a pretax, Roth, or a combination, your annual contribution limit will stay at $6,000.  As for the catch-up contribution limit, which if you remember is not subject to adjustments for inflation, it also stays the same as it was in 2020 at $1,000.  Should you be wanting to make contributions to your IRA, be aware that you can make 2021 contributions until April 15, 2022.

Defined Benefit Plans

For many self-employed individuals who are considered to be especially high-earners, a defined benefit plan is often the retirement account of choice.  If you have a DBP, your annual benefit limitation will stay at $230,000 in 2021.  Since this is considered to be one of the best pension plans available for individuals, it may be something you would want to learn more about from your CPA.

SIMPLE

Though not as common as an IRA or 401(k), many people do have a SIMPLE retirement plan If you do, you won't experience any changes in your annual contribution limits. The annual contribution limit will be $13,500, while the catch-up limit will stay at $3,000. 

Deductible IRA Phase-Out

If you have a traditional pretax IRA and enjoy being able to deduct your contributions, 2021 will allow you to earn just a little more along the way.  For example, as a taxpayer who contributes to a traditional IRA, the deduction in 2021 will be phased out for those who are singles and heads of households, are not covered by a retirement plan at their workplace, and have a modified adjusted gross income ranging from $66,000-$76,000 per year.  As for married couples who file jointly and one spouse who makes the IRA contribution is also covered by an employer retirement plan, the range of income phase-out has moved to between $105,000-$125,000.  In either case, this results in an increase of $1,000 from 2020. 

Saver's Credit

Applying to people who are low to moderate-income workers, the contribution limits have also increased slightly from 2020 to 2021.  For married couples filing jointly, the income limit moves from $65,000 to $66,000 in 2021.  For heads of household, the limit increases from $48,750 to $49,500, while single people and married couples who file separately will enjoy an increase from $32,500 to $33,000.

Qualified Longevity Annuity Contract

If you have an IRA or 401(k) and have some of the money from these accounts invested in a Qualified Longevity Annuity Contract (QLAC), the dollar amount that can be invested into the QLAC will remain at $135,000.

Roth IRA Phase-Out

Thanks to the inflation adjustment, you may be able to save on your Roth IRA phase-out for 2021.  As for the adjusted gross income phase-out ranges, married couples filing jointly will see a $2,000 increase to a range of $198,000-$208,000.   As for singles and heads of household, the income phase-out range will have a $1,000 increase to a range of $125,00-$140,000. 

Since you want to make sure you take advantage of all the opportunities afforded you in 2021, it is crucial you have a complete understanding of what may be available to you as you plan for your retirement.  To do so, you should schedule a consultation with a CPA whose experience and knowledge you know and trust.  By doing so, you can learn about the various retirement contributions related to different accounts, discuss the various options that may be open to you, and make informed decisions that will give you peace of mind.