Standard & itemized tax deductions for the 2021 tax year
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Retirement plan inflation adjustments for 2021


Welcome to Part 3 of the ol' blog's series on 2021 tax inflation adjustments. 
We started with a look at next year's income tax brackets and rates.
That first item also has a directory, at the end of the post,
of all of next year's tax-related inflation updates.
In today's post, we look at annual retirement plan contribution amounts,
and, for some taxpayers, tax deduction and credit options and limitations.
Note: The 2021 figures in this post apply to that tax year's returns to be filed in 2022.
For comparison purposes, you'll also find 2020 amounts that apply to this year's taxes, due April 15, 2021.


Retired coupled walking on beach
If this is how you want to spend your golden years (or before!), you need to save as much as you can now for retirement.

The post-work dream is a retirement where we can do exactly what we want. But to achieve that, we need to save since Social Security alone won't make that dream come true. And the coronavirus pandemic has thrown a lot of retirement plans into disarray.

Some older folks have opted for an earlier-than-planned retirement after losing their jobs when their companies downsized due to COVID-19 financial troubles. Others are taking advantage of the Coronavirus Aid, Relief and Economic Security (CARES) Act provision that allows for easier access to tax-favored retirement funds.

Now the Internal Revenue Service has some news — mostly good — for those still trying to build their nest eggs. The tax agency this week announced the amounts, revised annually based on inflation-affected cost‑of‑living adjustments, or COLAs, that will affect the various tax-advantaged retirement plans.

Here are the highlights of what will, or in some cases won't, change when it comes to retirement accounts in 2021.

No change for IRA contributions: Individual retirement arrangements, or IRAs as they are popularly known, are a great way to save for post-work years.

You can contribute to a traditional IRA with pre-tax dollars and possibly claim a deduction for at least some of the amount you're saving.

Or you can put already-taxed money into a Roth IRA and not have to worry about taxes on that retirement account every again.

When it comes to either type of IRA in 2021, inflation was not enough to mean an increase in the contribution limit. In 2021, it will remain at this year's level of $6,000.

The additional IRA catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment, so it remains at $1,000.

More earnings for IRA maneuverability: However, the IRS has increased the 2021 income ranges that determine whether you can make deductible contributions to a traditional IRA, contribute at all to a Roth IRA and/or claim the Saver's Credit.

Traditional IRAs are still popular because if you or your spouse don't have retirement plans at work, you can deduct your full IRA contribution.

If, however, either spouse is covered by a workplace retirement plan, the deductible amount of a traditional IRA contribution is phased out or totally eliminated depending on your filing status and income.

The table below shows how much more you can make in 2021 before you hit the level where your traditional IRA contributions are reduced or are no longer deductible. The 2020 amounts are shown, too, to give you an idea of the change and because you still have time to contribute to your IRA for this tax year.

 

2020 phase-out range
based on MAGI*

2021 phase-out range
based on MAGI*

Singles and
Heads of Households

who are covered at work by a retirement plan

$65,000 to $75,000 

$66,000 to $76,000 

Married couples
filing jointly 
and the spouse making the contribution is covered by a workplace retirement plan

$104,000 to $124,000

$105,000 to $125,000

Married couples
filing jointly
and the contributing spouse has no workplace plan, but his/her spouse is offered a workplace retirement plan

$196,000 and $206,000

$198,000 and $208,000

Married individual
filing a separate return
 
and is covered by a workplace retirement plan**

$0 to $10,000

$0 to $10,000

*MAGI is modified adjusted gross income. (Shameless plug: The ol' blog's glossary has more on MAGI, as well as the previously mentioned individual retirement arrangement/account and lots of other tax terms.)
**There is no annual inflation adjustment in married filing separately situations.

More room for Roth contributions: Roth IRA contributions are not tax deductible when you make them, but withdrawals when you retire are not taxed.

These accounts also have some income limits.

For 2021, the amount you can put into a Roth is reduced if your earnings are within the income range for your filing status in the following table. Again, the 2020 amounts are included for comparison and tax planning for the rest of this year.

 

2020 phase-out range
based on MAGI

2021 phase-out range
based on MAGI 

Singles and
Heads of Households

$124,000 to $139,000

$125,000 to $140,000

Married couples filing jointly

$196,000 to $206,000

$198,000 to $208,000


Again, note the top dollar amounts. Once your income exceeds the maximum amount for your filing status, you cannot contribute to a Roth IRA.

You can, however, contribute to a traditional IRA and then convert that account to a Roth IRA.

Just like a traditional IRA, the phase-out range for a married individual making Roth contributions while filing a separate tax return is not subject to an annual COLA and stays at $0 to $10,000.

Workplace plan changes, too: In addition to IRAs, some folks are able to stash retirement money in workplace defined contribution accounts known in the private sector as 401(k)s. Since benefits enrollment season for many companies is still open, be sure to check out this option.

Nest egg retirement components

The tax code monikers are slightly different for folks employed by other groups — 403(b) for some nonprofits and teachers, 457 plans for certain government employees and Uncle Sam's Thrift Savings Plan (TSP) for civil service employees and retirees, as well as for members of the uniformed services — but the same COLA changes tend to apply.

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the TSP stays the same in 2021 as it is now in 2020: a maximum of $19,500.

The catch-up contribution limit for employees aged 50 or older and who participate in these plans also remains unchanged next year at $6,500.

And if you're lucky enough to work for a place that has an old-school defined benefit plan — this is where your boss takes total care of your retirement fund — things here will stay the same, too. The limitation on the annual benefit of this retirement plan stays in 2021 at this year's level of $230,000.

Self-employed plan bumps: When you're the boss at your own company, in addition to concentrating on turning a profit, you need to think about the day when you decided to relinquish control.

SEP-IRAs (or, from the glossary, Simplified Employee Pension) and Solo 401(k) are popular retirement vehicles for the self-employed and small business owners.

The maximum amount that can be put into either of these plans as an employer is determined by a percentage of salary. Once those calculations are completed (thank goodness for tax pros and/or tax software!), the maximum in 2021 will be $58,000. That's $1,000 more than allowed in 2020.

The amount of earnings amount used to figure your SEP or SoloK contribution also goes up next year. The compensation of $285,000 in 2020 goes to $290,000 in 2021.

If you have a SIMPLE, or savings incentive match plan for employees (final, I swear, glossary plug), the limit on SIMPLE plans for 2021 is $13,500. That, too, is the same as the 2020 cap. The SIMPLE catch-up limit next year also holds in 2021 at this year's $3,000 level.

Added credit for saving: The Saver's Credit, or the Retirement Savings Contributions Credit as it's officially titled, is a tax break the rewards low- and moderate-income individual for adding to their nest eggs.

This credit, which is a dollar-for-dollar reduction in any tax you owe, is $1,000.

You can claim the Saver's Credit based on the money you put into IRAs and workplace plans, either where you are an employee or are self-employed. But it is not available if you make more than the earnings limit for your filing status.

In 2021, the Saver's Credit maximum earnings caps go to:

  • $33,000 for singles and married filing separately taxpayers, up from $32,500 in 2020;
  • $49,500 for heads of household, up from $48,750 for 2020; and
  • $66,000 for married couples filing jointly, up from this year's limit of $65,000.

Here's the full table and percentages, based on your adjusted gross income (AGI) for the 2021 Retirement Saver's Credit:

Credit Amount

Single, married filing separately or qualifying widow/er

Married filing jointly

Head of household

50% of your contribution

AGI not more than $19,750

AGI not more than $39,500

AGI not more than $29,625

20% of your contribution

$19,751 to $21,500

$39,501 to $43,000

$29,626 to $32,250

10% of your contribution

$21,501 to $33,000

$43,001 to $66,000

$32,251 to $49,500

No credit

$33,001 or more

$66,001 or more

$49,501 or more


And if you're looking to claim the Saver's Credit on your 2020 tax return, you can if your income this year falls within the following income ranges:

Credit Amount

Single, married filing separately or qualifying widow/er

Married filing jointly

Head of household

50% of your contribution

AGI not more than $19,500

AGI not more than $39,000

AGI not more than $29,250

20% of your contribution

$19,501 to $21,250

$39,001 to $42,500

$29,251 to $31,875

10% of your contribution

$21,251 to $32,500

$42,501 to $65,000

$31,876 to $48,750

No credit

$32,501 or more

$65,001 or more

$48,751 or more


More inflation figures: These retirement plan inflation adjustments are a lot of numbers, but if you want more, you can peruse the official details on the 2021 COLA changes in IRS Notice 2020-79.

And as noted in the intro to this post, you can find an index to the full 10-part 2021 tax inflation series at the end of the series' first post on next year's tax rates and income brackets.

Stay tuned. Three down, seven to come!

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Comments

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B Mandel

The tables you present for taxes and retirement plans are very helpful.

The government also has variable payments for Medicare that are related to inflation and numbers taken from 1040.... Magi and agi. The result can be an IRMAA assessment additional tax/fee for Medicare. Please considfer adding info on this to your blog.

Shocking to learn that when spouse dies Medicare cost increases when tax filing single vs joint married.

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