If you are looking to save more money toward your retirement savings next year, you may be wondering how much the IRS will allow in tax deferrals for 2021.
One of the key benefits of savings accounts like 401(k)s, IRAs, and HSAs is that you can deduct the money you put in off your taxable income this year, thus lowering your tax bracket. With the exception of Roth accounts, you do not have to pay taxes on the amount of money saved until you withdraw the money from your account in retirement.
Additionally, your invested money will be generating returns and compounding interest over the years. As long as your 70th birthday isn’t until after July 1, 2019, SECURE Act changes to 401(k) distribution rules stipulate your Required Minimum Distributions aren’t mandatory until you turn 72 (an increase from 70.5).
401(k) Contribution Deadline in 2021
Every year, around October, the Internal Revenue Service announces their updates for the coming year.
You have until your taxes are due on April 15th to continue making your contributions for the year – which means, if you’re reading this in January of 2021, you still have 3.5 more months to meet the 401(k) contribution deadline for 2020. also not that they need to declare their deferrals on 12/31/2020 in writing if they intend to fund in 2021. You have until April 15, 2022 to finish making your contributions for 2021.
2021 401(k) and 403b Individual Contribution Limits
The individual contribution limits and catch-up contributions for 2021 remain the same as 2020.
- Age 49 and Under: $19,500
- Age 50 and Older: $26,000 (Additional $6,500)
Even if you don’t turn 50 until December 31, 2021, you can still make the catch-up contribution for the year.
2021 401(k) Maximum Employer/Employee Limits
Most 401(k) plans allow employer contributions through a non-elective contribution or a match formula.
- This amount will increase by $1,000 in 2021, from $57,000 to $58,000.
- If you meet the individual maximum, your employer can add on up to $38,500 in additional funding.
- Catch-up contributions are not included in the limit, so those 50+ could see accounts worth $64,500.
Every plan is different, so refer to your Plan Document to be sure you maximize 401(k) contributions.
SEP IRA and Solo 401(k) Limits in 2021
If you have a SEP IRA or Solo 401(k), you may contribute up to the limit as both Employer and Employee.
- The maximum is $58,000 – up $1,000 from 2020.
- The compensation limit used in the savings calculation increased from $285,000 to $290,000 in 2021.
A spouse may contribute the same amount to the plan, effectively doubling your tax-free household savings and retirement earnings!
SIMPLE 401(k) Limits for 2021
A SIMPLE small business 401(k) offers easier administration and exemption from nondiscrimination testing.
- The limit for SIMPLE 401(k)s remains unchanged in 2021 at $13,500.
- The catch-up contribution of $3,000 (for a total of $16,500) for those over 50 is also the same.
2021 Highly Compensated Employee and Key Employee Definitions and Limits
Employers with Traditional 401(k) plans need to know who to consider a “Highly Compensated Employee” or “Key Employee” to ensure they pass nondiscrimination testing for the 2021 plan year. If you are worried about passing these tests every year, you may consider a Safe Harbor 401(k), which are not subject to such rules.
- Key Employee Officer Compensation: $185,000
- Highly Compensated Employee: $130,000
- Annual Compensation Limit: $290,000
2021 Roth and Traditional IRA Contribution Limits
An IRA is another type of retirement savings account you may have.
- Age 49 and Under: Up to $6,000 (must have earned income)
- Age 50 and Older: Up to $7,000 (Additional $1,000)
2021 Traditional IRA Modified Adjusted Gross Income Limits for Full Deductibility
For full deductibility of a Traditional IRA in 2021, you will need to earn no more than:
- $105,000 if filing joint (increased by $1,000 since 2020)
- $66,000 if filing single (increased by $1,000 since 2020)
Full deductibility is available for working or nonworking spouses of plan participants who are not covered by an employer and whose Modified Adjusted Gross Income is less than $198,000 (up $2,000 since 2020).
Note: If neither participant or spouse are enrolled in a workplace plan, then the Traditional IRA contribution is always tax-deductible, regardless of income.
2021 Traditional IRA Modified Adjusted Gross Income Limits for Partial Deductibility
For partial deductibility of a Traditional IRA in 2021, you will need to earn no more than:
- $125,000 if filing joint (increased by $1,000 since 2020)
- $76,000 if filing single (increased by $1,000 since 2020)
Partial deductibility is available for working or nonworking spouses of plan participants who are not covered by an employer and whose Modified Adjusted Gross Income is less than $208,000 (up $2,000 since 2020).
Note: If neither participant or spouse are enrolled in a workplace plan, then the Traditional IRA contribution is always tax-deductible, regardless of income.
2021 Roth IRA Modified Adjusted Gross Income Phase-Out Ranges
If your Modified Adjusted Gross Income is between limits in 2021, your contribution limits will be reduced:
- Individuals Filing Single: $125,000-$139,999
- Married Couples Filing Joint: $198,000-$207,999
If your Modified Adjusted Gross Income is above these limits, you cannot contribute at all in 2021:
- Individuals Filing Single: $140,000
- Married Couples Filing Joint: $208,000
2021 Health Savings Account (HSA) Contribution Limits
A Health Savings Account is yet another method of reducing your taxable income for 2021, but all the money must be used on health-related expenses.
- Individual (Employer + Employee): $3,600 (up $50 from 2020)
- Family (Employer + Employee): $7,200 (up $100 from 2020)
- Age 55 or Older: Additional $1,000
Catchup contributions can be made any time during the year in which the HSA participant turns 55.
Do You Have Questions About Your 401(k) Contributions for 2021?
Ubiquity is a solopreneur and small business 401(k) plan provider offering full support for both employers and employees. Contact us to learn about starting a new 401(k), switching to a different type of plan, 401(k) withdrawal rules, or maximizing your contributions in 2021.
