The Internal Revenue Service (IRS) recently announced some adjustments to the income limitations on retirement account contributions for 2021. These changes were in the works regardless of who won the 2020 presidential election. President-elect Joe Biden has laid out ambitious plans to improve retirement savings rates, which could mean further changes will be coming at some point in 2021. As for now, we need to make contributions as per the following rules laid out by the IRS.
Income Limits for the Traditional IRA in 2021
Workers who have retirement plans available where they work, the income range for 2021 will be $66,000 to $76,000, up from $65,000 to $75,000. Married couples who file their taxes jointly can earn larger incomes and still contribute to a traditional IRA in 2021. For married couples who are covered by a retirement plan at work, the income range will be $105,000 to $125,000 in 2021, up from $104,000 to $124,000 in 2020.
The rules are different for workers not covered by a retirement plan at their work but who have spouses who are covered through their employers retirement plan. This is just one example of the marriage penalties that exist within the IRS tax code. The deduction for contributions to a traditional IRA will be phased out if the couple’s income is $198,000 to $208,000 in 2021, up from $196,000 and $206,000.
There is no change to the income phase-out for a married taxpayer filing separately (MFS) who is covered by a workplace retirement plan; the phase-out range will remain $0 to $10,000 in 2021, the same as 2020.
Unfortunately, the limit on annual contributions to a traditional IRA remains unchanged at $6,000. The additional catch-up limit for those 50 and older is not subject to a yearly cost of living adjustment (COLA) and remains at just $1,000.
Income Limits for a Roth IRA in 2021
With tax rates near record lows, the government running up record deficits, and the national debt soaring to levels never seen in the history of the United States, the tax-free growth and withdrawal of a Roth IRA may become more appealing for many workers. There are income limitations on the Roth IRA, regardless of whether you are covered by a workplace retirement plan. For singles and heads of household, the income phase-out range for taxpayers making contributions to a Roth IRA will be $125,000 to $140,000 in 2021. This is up from $124,000 to $139,000 in 2020. For those who are married and filing jointly, the Roth IRA income phase-out range will be $198,000 to $208,000 in 2021, up from $196,000 to $206,000. For those who choose to use the married filing separately option, the range for a MFS taxpayer who makes contributions to a Roth IRA remains $0 to $10,000. The changes here are not dramatic, but every little bit of extra tax-free income in retirement can improve your retirement security.
The limit on annual contributions to a Roth IRA will remain unchanged at $6,000, in 2021. The additional catch-up limit for those 50 and older is not subject to an annual COLA and remains $1,000.
401(k) and Other Workplace Contribution Limits in 2021
The limit on contributions by employees who choose to participate in their workplace retirement plans, including 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan, remains unchanged at $19,500. Similarly, the catch-up contribution limit for employees 50 and older, who participate in these plans, remains unchanged at $6,500.
Retirement will be here before you know it; make a point to increase the amount you are contributing to your retirement account in 2021. Every little bit helps, and the sooner you get started seriously investing for retirement, the easier it will be to create a retirement income you will not outlive.