2021 Retirement Plan Contribution Limits and Phase-Outs – Cravitz Financial & Insurance Solutions

2021 Retirement Plan Contribution Limits and Phase-Outs

Video Transcript:

Hey, what's going on, everybody. It's Ryan here. Okay. So the new 2021 guidelines, or rules, or just release as far as how much you're allowed to contribute to various retirement accounts, such as IRAs and 401ks and that sort of thing, for the year 2021. And then also they've outlined what the new phase-out ranges are as well. So I figured I would go ahead and record this quick video. I was just taking a look at it here myself. You're going to see that some of the things are already highlighted as I'm going through it. So with that, let me go and share my screen and we'll walk through it here together. I will tell you not much has changed between 2020 and 2021, but nevertheless, let's go ahead and go through it here.

And actually, let's go down here to the bottom first. This is really easy. First off, none of the contribution limits have changed at all. They're exactly the same in 2021 as they were in 2020. And this is the way it works, if you're not familiar with it. So for 401(k)s, 403(b)s, most 457 plans and the federal government Thrift Savings Plan, the TSP, all remain unchanged at $19,500. The catch-up contribution limit for employees age 50 and over is an extra $6,500. So if you're 50 or over, you can actually contribute $26,000. That's the maximum. And if you have access to a simple retirement account at work, the maximum that you can contribute to those is $13,500. And the limit on annual contributions to an IRA is still $6,000. Now if you're 50 or over, you can do an extra thousand dollars catch-up contribution.

So your maximum's going to be $7,000. So real simple. Contribution rates are exactly the same. The thing that has changed, and you'll see that here at the top, is that the income ranges have changed. And by the way, this is straight from the IRS website. What I'll do is I'll go ahead and include a link down below in the notes section. So you can go there as well if you like. By the way if you really want to get more in depth, you can click right here and it'll link you to a PDF on their site where you can get even more detailed information on all of this. But this just, what we're looking at right here that was released on October 26, 2020, gives you really probably most of everything you're going to need to know on this. But let's go through the changes that did take place. Specifically, as far as the phase-outs and such.

So let me go ahead and read this, and then I'll stop and I'll explain what different things mean and certainly offer my opinion here on a couple of things. But the income ranges for determining eligibility to make the deductible contributions to traditional individual retirement accounts, to contribute to Roth IRAs and to claim the Savers Credit, all increased for 2021. Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or his or her spouse was covered by a retirement plan at work, the deduction may be reduced. By the way, a retirement plan at work just means, let's say you have access to a 401k plan. So if you have access to a retirement plan at work, either you or your spouse, the deduction may be reduced or phased out until it's eliminated. Depending on filing status and income.

Now if neither the taxpayer nor his or her spouse is covered by a retirement plan at work, the phase outs of the deduction do not apply. So here are the phase out ranges for 2021. So here's what this means. So for instance... Let me go ahead and read the first bullet point, then I'll explain. So for single taxpayers covered by a workplace retirement plan, the phase-out range is $66,000 to $76,000, which is up from $65,000 to $75,000. So what that means is, let's say you're single, income is under $66,000 you can contribute to a 401k, let's say at your work, on a pre-tax basis and you can also contribute to a traditional IRA and get a tax deduction. Now having said that, I will say in a lot of situations I find that it's best for somebody in that situation, at that income and such, to contribute to a Roth IRA.

Now, not always going to be the case. May not be the case certainly for you. I don't know you. But a lot of times being able to get tax-free money in the future, a lot of times that can make a lot of sense. Keep in mind when you contribute to any of these pre-tax accounts, it's nice getting the tax deduction now, but eventually you're going to have to pay the taxes on it. And we never know for sure how much of that is going to go to us and how much of that is going to be shared with Uncle Sam. It depends upon what the tax rates are at that time. What your income is and all that sort of thing. So if you ended up doing a really good job of putting a lot of money into 401ks, contributing a lot and if they grow real well, the investments do well and such, you're going to have a lot of money in these retirement accounts that the money's never been taxed.

And ultimately that can push up your income and retirement, make your social security benefits taxable when they may not have been. It'll make Medicare costs more to you than it might have otherwise. All those sorts of things. So a lot of times I will recommend a Roth IRA. Tax-free money is good. Yeah, you don't get the tax deduction upfront, but you have to weigh what you're going to save in taxes today versus what you may have to pay in taxes down the road. And quite frankly, a lot of times it can make sense to have a balance between taxable and tax-free, as far as the withdrawals that you're going to take in retirement. But that's a whole nother video right there. So for married couples filing jointly with a spouse making the IRA contribution is covered by a workplace retirement plan, the phase out range is $105,000 to $125,000, which is up from $104,000 to $124,000.

So again, hasn't really changed very much there at all. Now for an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased-out if the couple's income is between $198,000 and $208,000, up from $196,000 and $206,000. So again, slight increases. Now, I explained what that meant for the single person, as far as if their income was under $66,000, as an example. They can contribute and get a tax deduction. The way that it works is if their income was over $76,000, they cannot contribute to an IRA and get a tax deduction. Assuming, again, also that they have that access to a workplace retirement plan. And then the range right here, between $66,000 and $76,000.

So let's just say, we're talking to somebody that's, I don't know, 48-years-old and they can contribute $6,000 to an IRA. Well if their income is, let's say, halfway in between there. Let me make my math easy. In between $66,000 and $76,000 is $71,000. So that means they're halfway through the phase-out there. So what that means is that they would only be able to contribute half as much to the IRA and get that tax deduction, or they can only contribute up to $3,000 to get a tax deduction. Anymore that they contribute they would not get a tax deduction on for the IRA contribution. So that's how the phase-out works. And it works the same, again, for a married couple as well. No matter whether you have access to the retirement account at your work yourself or whether your spouse does, it's just the income ranges are different. As you can see right here.

So let me go ahead and just highlight that. So you've got $105,000 to $125,000. $105,000 to $125,000 is if it's yours, if you have access to a retirement plan at work. And then if your spouse has access to it, it's $198,000 to $208,000. And then for a married individual filing a separate return who was covered by a workplace retirement plan, the phase-out range is not subject to an annual cost of living adjustment and remains 0 to $10,000. The income phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household. Up from $124,000 to $139,000. So as long as you make less than $125,000 and you're single, you can contribute the full amount to a Roth IRA.

And then again, same thing. If you make more than $140,000 and you're single, you can not contribute to a Roth IRA. If it's between $125,000 and $140,000 you can contribute, but not the full amount. Again, it phases out depending up on how close your income is to that $140,000 mark. For married couples filing jointly the income phase-out range is $198,000 to $208,000, which is up from $196,000 to $206,000. The phase-out range for a married individual filing a separate return and who makes a contribution to a Roth IRA is not subject to an annual cost of living adjustment and remains 0 to $10,000. And then finally, the income limit for the Saver's Credit, also known as the Retirement Savings Contribution Credit, for low and moderate income workers is $66,000.

For married couples filing jointly, which is up from $65,000. $49,500 for heads of household, which is up from $48,750. And $33,000 for singles and married individuals filing separately, up from $32,500. Okay, all right. So hope all that makes sense. If you have any questions on it, just let me know. Take care. Have a good one. Talk to you soon.


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