For many retirement savers, a 401(k) serves as the cornerstone of their investment strategy. The maximum amount that people can contribute to this account is generally adjusted each year based on inflation and economic conditions.
The recently announced regulations for 2021 did not change significantly from 2020, potentially disappointing workers during a time when people are more stressed about being able to save enough for the future than ever before. The basic salary deferral for a 401(k) contribution will remain steady at $19,500, with the catch-up amount for people 50 and older remaining at $6,500.
While these numbers are not exciting for most workers, some may be able to save slightly more than they did in 2020. The overall limit for 401(k) plans and similar accounts will increase from $57,000 to $58,000 in 2021. The people who can contribute this additional $1,000 are those employed by companies with special after-tax salary deferrals, as well as self-employed individuals who have always been able to save to the limit through either solo or individual 401(k)s, as well as SEP retirement plans.
Unfortunately, contributions to individual retirement accounts (IRAs) are not increasing. The contributions to these accounts will remain capped at $6,000 with a $1,000 catch-up for people 50 or older.
More Tax Breaks Related to Retirement Savings Plans
Even if people are not able to save more money in their retirement accounts in 2021, it is important to note that many more workers will qualify for tax breaks related to their savings. In other words, you may end up owing less money while saving the same amount, so you could have more cash in your pocket to funnel into other retirement savings accounts. The most important changes to note relate to IRA phase-out amounts.
According to tax law, once income reaches a certain level, deductions for IRA contributions begin to decrease until no deduction is granted. For a single filer, the phase-out range will start at $66,000 instead of $65,000 and end at $76,000 instead of $75,000. For married couples filing jointly, the 2021 phase-out range is from $105,000 to $125,000, which is an increase of $1,000 on each end.
If a couple is married and the spouse contributing to an IRA is not covered by a workplace retirement plan while the other is, the phase-out range for 2021 is $198,000 to $208,000, increased from $196,000 to $206,000 for 2020. However, for a married person filing a separate return who is covered by a workplace retirement plan, the upper limit of the phase-out is $10,000, which is unchanged from 2020. This range is not subject to an annual cost-of-living adjustment.
One of the best alternative retirement savings accounts for people who have more money to put away after contributing to a 401(k) is a Roth IRA. This account allows after-tax money to be invested and grow without taxation. Then, distributions are made without any taxes due. The amount that can be contributed to a Roth IRA is based on income, specifically modified adjusted gross income. The limits have been slightly increased for 2021 to $125,000 if single and $198,000 if married and filing jointly. Above this amount, contribution limits start to phase out as with a traditional IRA. The upper limit of being able to contribute will be $140,000 for single individuals and $208,000 for married people filing jointly. A married person filing a separate return gets phased out at $10,000.
One of the most exciting tax developments for 2021 is the increase in income limit for the Saver’s Credit. This tax credit is meant to encourage people who earn low and moderate incomes to save for retirement. A tax credit is a complete deduction in the amount due. For 2021, the caps for this tax credit have been increased to $33,000 for single filers, $49,500 for a head-of-household filer, and $66,000 for joint filers. These increases may encourage people with less income to save since the money is basically free for those who qualify.
The 2021 Situation for Some Less Common Retirement Plans
While 401(k)s and IRAs remain the most popular types of retirement savings vehicles, other types of accounts may be affected by the new 2021 figures. The SIMPLE plan, for example, which is meant for small companies, has contributions limits unchanged at $13,500, with a catch-up limit of $3,000 for people 50 and older. For SEP IRAs and solo 401(k)s, the limit goes from $57,000 to $58,000, as already mentioned. However, the compensation limit used to calculate savings also increases from $285,000 to $290,000 in 2021.
For a defined benefit plan, which is sort of like an individual pension plan for self-employed individuals, the limit is steady at $230,000. Finally, the dollar limit on IRA or 401(k) investments in a qualified longevity annuity contract also stays steady at $135,000.