For 2021, the IRS brings a lot of the same with regards to retirement plan contribution limits. Nearly everything remains unchanged when compared to 2020 except maximum contribution limits (which really only comes into effect if you are self-employed or work for a generous employer). To me, this is a disappointment, as I see a retirement crisis underway in our country. It seems like there is some traction in this regard within the new administration, but we’ll see if that goes anywhere in the near future (google “Secure Act 2” for details).
The limits for the following accounts stay consistent: IRA, Roth IRA, 401(k), 403(b) and SIMPLE IRA. Savers over 50 will still be eligible for a catch-up allowance. Health Savings Accounts (HSA) get a small boost from 2020. You are able to make a $1,000 catch-up contribution if you are age 55 or higher. Who knows why HSAs have to abide by a different age for catch-up contributions? I’m an advisor and have no clue. Oh well. We don’t write the rules – we just help ensure you adhere to them.
In summary, you may contribute up to $6,000 to an IRA ($7,000 if you are age 50 or older). You may contribute $19,500 to an employer sponsored retirement account, i.e., 401(k), 403(b), or SAR-SEP ($26,000 if you are age 50 or older). Remember, to be eligible for the catch-up allowance, you need to turn 50 this calendar year. If you are 49 now, but turn 50 in November, you are eligible for the full catch-up provision for the entire year.
A break down of changes are as follows (…surprise! They are unchanged):
The defined contribution plan limits (401(k), 403(b)) increases from $57,000 to the lesser of $58,000 or 100% of compensation (this includes employee and employer contributions).
We are a big fan of Health Savings Accounts here at WealthPoint as they are triple-tax advantaged. We view them as your best retirement account earmarked for future healthcare costs. See Josh Bentz’s blog post on why we think you should invest your HSA for retirement and pay for healthcare expenses out of current cash flow: https://wealthpointadv.com/why-you-should-care-about-health-savings-accounts-hsas/.
Lastly, the income phase-out range for making Roth IRA contributions has increased. Taxpayers with modified adjusted gross income (MAGI) under the lower end of the ranges shown below can make a full Roth IRA contribution. If you are in the range, you will only be able to contribute a portion of the $6,000 max. These limits do not apply to making Roth 401(k) contributions, if your employer allows it.
If your income is too high for the year, consider a backdoor Roth IRA contribution. See Brie Black’s post on when and how to execute one: https://wealthpointadv.com/a-tax-free-roth-option-for-high-earners/.
If you plan to save the max to your employer sponsored plan this year, be sure to review and potentially change your payroll deferral percentages. Also, if you turn the big 5-0 this year, don’t forget about the catch-up provisions.
Happy New Year and Happy Savings!