Plan for this year and catch up on IRA retirement savings
Last year was tough, but 2021 brings a fresh opportunity to get retirement savings back on track, and even a little more time to max out IRA contributions from last year as well.
The Internal Revenue Service announced that employees in 401(k) plans will be able to contribute up to $19,500 this year, unchanged from 2020. This and other changes in Notice 2020-79 (PDF), provides cost‑of‑living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2021.
Key changes for 2021:
- Profit Sharing Plan annual limit increased to $58,000
- Health Savings Account (HSA) contribution limits increased to $7,200 for family coverage and $3,600 for individual
Stayed the same:
- 401(k) salary deferral limit at $19,500 per individual 401(k)
- 401(k) catch-up contributions at $6,500 for those over 50
- IRA annual contribution limit at $6,000
- IRA catch up contributions at $1,000 for those over 50
Other notable changes:
In 2021, the adjusted gross income (AGI) phase-out range for taxpayers making contributions to a Roth IRA is $198,000 to $208,000 for married couples filing jointly, up from $196,000 to $206,000 in 2020. For singles and heads of household, the income phase-out range is $125,000 to $140,000, up from $124,000 to $139,000 in 2020.
If you earn too much to open a Roth IRA, you can open a nondeductible IRA and convert it to a Roth IRA as Congress lifted any income restrictions for Roth IRA conversions.
Catching up on 2020 IRA contributions:
If you stalled your normal contributions, or didn’t save as much as you’d hoped, it’s not too late to catch up on 2020 savings.
2020 IRA contributions can be made until April 15, 2021. If you happen to be ahead and exceed the 2020 IRA contribution limit, you may withdraw excess contributions from your account by the due date of your tax return (including extensions). If you do not, you must pay a 6% tax each year on the excess accounts left in your account.
It’s important for investors to keep up with annual limit changes—that is why Cain Watters CPAs work with their clients to plan out their annual budget and savings strategy, ensuring they are aware of limit changes, and creating a plan to maximize the contributions. An essential first step of any plan is to ensure you are taking advantage of the maximum benefit allowed under the law.