IRA Financial’s Adam Bergman Esq. discusses the recently announced contribution limits for 2021 for retirement plans, including the Solo 401(k), Self-Directed IRA, SIMPLE and SEP IRAs, along with a historical look at the limits.
As it does annually, the IRS has released the 2021 IRA & 401(k) Maximum Contribution Limits. Each year, these numbers may be adjusted based on cost-of-living expenses and inflation. There are no major changes to regular 401(k) and IRA limits. However, there have been some increases for self-employed plan and income restrictions for Roth contributions and tax deductions.
2021 Contribution Limit
Currently, the limit on annual contributions to an IRA sits at $6,000. If you are at least age 50, there’s an additional catch-up contribution of $1,000. Those numbers remain unchanged. These limits apply to both traditional IRAs and Roth IRAs. Traditional plans offer a tax deduction. There are income restrictions as to who receives this deduction. Essentially, if you earn too much money, you do not get the tax break. For 2021, single filers who earn less than $76,000 and married couples filing jointly who earn $125,000 (contributor covered by a workplace plan) or $208,000 (contributor not covered) receive a deduction. These figures are an increase of either $1,000 or $2,000 from 2020.
An increasingly popular option, the Roth IRA, does not offer an upfront tax deduction, however, all qualified distributions are tax free. The idea of tax-free wealth during retirement is quite appealing for many. But again, there are income restrictions; those that earn above the thresholds cannot directly contribute to a Roth IRA. For 2021, single filers who earn less than $140,000 and married couples earning less than $208,000 can contribute to a Roth IRA. Those earning more cannot contribute to a Roth IRA directly. However, they can contribute after-tax funds to a traditional plan and convert them to a Roth. This is known as the Backdoor Roth IRA.
Small Business IRA Plans
Two popular requirement plans for small business are the SEP IRA and SIMPLE IRA. They are quite attractive as they are easy to set up and do not cost as much money as a 401(k) plan. The SIMPLE IRA contribution limits remain unchanged from 2020. You may contribute up to $13,500 plus an additional $3,500 if you are at least age 50.
There was an increase to SEP IRAs. For 2021, you may contribute up to $58,000 to a SEP. This is up $1,000 from 2020. There is no catch-up contribution for SEP IRAs. Obviously, you can contribute more to a SEP than you can a SIMPLE plan. If you are a small business owner, one choice may be better for you. If you have an owner-only business, you may want to check out the Solo 401(k).
2021 401(k) Contribution Limit
Just like the IRA, there is no change in the employee contribution limit for 2021. The maximum you can contribute to a 401(k) plan for 2021 remains at $19,500. The catch-up contribution for those at least age 50 remains unchanged at $6,500. This means anyone at least age 50 can contribute up to $27,000.
If you are self-employed and utilize the Solo 401(k) plan, you get to put away a little more next year. Contributions to a Solo 401(k) can be made as both the employee and the employer. As we just mentioned, the employee deferral remains at $19,500. However, the employer contribution has risen $1,000 to $38,500. Therefore, you can contribute up to $64,000 to your Solo 401(k).
Remember, you cannot have full-time employees with your business, other than a spouse or partner. The Solo 401(k) are for sole proprietors and those that have self-employment income. If you have employees, you need to look at the SEP or SIMPLE IRA.
Lastly, your contribution limit is based on your earned income for the year. Essentially, it’s a percentage of the money you make annually. The maximum amount you can use to calculate your limit has gone up $5,000 to $290,000 for 2021.
As you can see, nothing much has changed in regards to the 2021 IRA & 401(k) maximum contribution limits. In part, this may be due to the ongoing COVID-19 crisis. Mr. Bergman also put together some data about the historical trends of the contribution limits. How does this year compare to the previous decades? Listen to the podcast for some interesting stats.
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