New 401k and IRA contribution limits for 2021
Here is all you need to know about your 2021 contribution allowances to retirement accounts ..
The Internal Revenue Service has announced the adjustments affecting dollar limitations for workplace retirement plans and other retirement-related items for 2021. Here, in plain English, are some of the highlights that could well affect you.
Please understand that the information below ONLY deals with the two most common tax filing statuses of Single or Married Filing Jointly. The rules and thresholds for the other tax filing statuses (including Married Filing Separately) can be substantially different. Please consult your tax professional for this information.
Much of the information refers to the concept of Modified Adjusted Gross Income (MAGI). See here for what constitutes MAGI and how it may differ from simply Earned Income.
1) YOUR EXISTING 401k PLAN
There can be small differences between 401k plans, 403b plans and 457 plans but for the sake of simplicity, I will refer here to the most common one, the 401k plan.
The basic annual contribution limit for 2021 for employees who participate in any of these three plan types remains unchanged at $19,500. The annual “catch-up” contribution limit for employees aged 50 and over who participate in 401k plans is also unchanged at an additional $6,500 in 2021, so those older employees can still contribute up to a total of $26,000.
The amount referred to above is purely employee contributions and does NOT include any employer match which, if offered, can supplement the employee contribution.
Employee contributions to these plans are not subject to any income limits.
2) TRADITIONAL IRAs
The overall annual contribution limit for individual retirement accounts (Traditional and Roth combined) remains unchanged at $6,000 for 2021. For taxpayers age 50 or over, the limit will remain at $7,000 after taking into consideration a $1,000 catch-up provision.
The tax-deductibility of these contributions is, however, subject to income limits.
The pro-rated phase-out of the tax deductibility of your contributions if you file as Single and were eligible to contribute to an employer work retirement plan at any time during the year like a 401k/403b/SEP/SIMPLE etc. (regardless of whether you actually contributed or not), now starts at $66,000 of MAGI and if your MAGI is greater than $76,000, then none of your contribution will be considered deductible and our advice is to not make a non-deductible contribution.
The pro-rated phase-out of the tax deductibility of your contributions if you file as Married Joint and were both eligible to contribute to company work plans at any time during the year, starts at a slightly higher level of $104,000 of MAGI and if your combined MAGI exceeds $124,000, then none of your contribution will be considered deductible and our advice is to not make a non-deductible contribution.
The pro-rated phase-out of the tax deductibility of your contributions, if you file as Married Joint and you were not eligible to contribute to a company work plan, but your spouse was, now begins at a combined $198,000 MAGI and if your combined MAGI exceeds $208,000, then none of your contribution will be considered deductible and our advice is to not make a non-deductible contribution.
For Single filers who are not eligible to contribute to a company plan or Married Joint filers where neither is eligible, then all contributions are fully tax deductible, regardless of income.
3) ROTH IRAs
The overall annual contribution limit for individual retirement accounts (Traditional plus Roth combined) remains unchanged at $6,000 in 2021. For taxpayers age 50 or over, the limit will remain at $7,000 after taking into consideration a $1,000 catch-up provision.
The ability to make contributions to Roth IRAs is, however, subject to income limits.
Contribution limits to Roth IRAs are unaffected by your eligibility to contribute to a workplace plan. They are based solely on your MAGI. Unlike Traditional IRAs, where you simply do not get a tax deduction beyond the phase-out limits but can still make a non-deductible contribution if you choose to (not a good idea though), with a Roth IRA; you are prohibited from contributing at all if you earn beyond the MAGI phase-out limit and will be assessed penalties if you do so.
If you contribute to your Roth IRA during 2021, but then later discover that you are ineligible to have done so based on what your income for the year ended up being, then you need to withdraw this contribution (plus any earnings made on the contribution) before April 2022 as a “Removal of Excess Contribution” to avoid these penalties.
The pro-rated phase-out range for taxpayers making Roth IRA contributions is now a MAGI of $125,000 to $140,000 for Single filers and a combined MAGI of $198,000 to $208,000. To be clear, if your MAGI exceeds either of those upper limits, you are prohibited from contributing anything to a Roth IRA that year.
If this is the case, check out my article “Is The Backdoor Roth IRA Contribution Right For You?” for a possible alternative strategy.
There is now no minimum or maximum age limit on who can open up and/or contribute to a Traditional or a Roth IRA (before 2020 there had been an upper age restriction on contributing to Traditional IRAs, but that has now been lifted), but remember that the annual contribution cannot exceed the earned income of the account owner that year - as disclosed on that account owner's tax return. In the case of minors who may show some earned income (from a summer job, perhaps) and for whom tax returns are filed, this would usually mean a Roth IRA is the best option, not a Traditional.
The $6,000 or $7,000 limits can be spread across both types of IRA if you wish. For example, if eligible for either and under 50 years old - you could, for example, contribute $2,000 to a Traditional IRA and $4,000 to a Roth IRA, but not more than $6,000 total to either or a combination of both.
See below for all 2021’s important numbers: