The IRS has released the 2021 contribution limits for retirement plans and other cost-of-living adjustments. 

Maximum Employee Contributions to Defined Contribution Plans: Unchanged

For employees with 401(k), 403(b), Roth 401(k), most 457 plans, or the federal government’s Thrift Savings Plan, the contribution limit will remain at 19,500 in 2021. Is maxing out your 401(k) enough? Here’s what it could get you in retirement.

Annual Catch-up Contributions for Employees Over 50: Unchanged

Workers over 50 years old with defined contribution plans (401(k), 403(b), most 457 plans, or the federal government’s Thrift Savings Plan) can expect no increase on the catch-up contribution limit. The catch-up contribution is $6,500 in 2021. In total, individuals 50+ can save $26,000 per year in a defined contribution plan.

Overall Contribution Limit (Employer + Employee) for Defined Contribution Plans: Increase

The overall annual additions limit has increased $1,000 to $58,000 in 2021. The total sum of employee contributions, employer additions, and employer profit-sharing contributions cannot exceed $58,000. Catch-up contributions for individuals age 50 or older are not included in the overall limit. 

Self-employed and Small Business Owners: SEP IRA and Solo 401(k) Limits: Increase

The total annual contribution limit for both SEP IRAs and Solo 401(k)s has increased $1,000 to $58,000 in 2021. However, the amount that can actually be added each year is subject to an additional limitation: a percentage of W-2 earnings or net self-employment income. In 2021, the compensation limits for these calculations increased $5,000 to $290,000. 

SEP IRAs are funded solely by employer contributions. Solo 401(k) plans can be funded by a business owner in two ways: as the employee and the employer, subject to the maximum annual additions limit. Like a traditional 401(k) plan, maximum employee contributions in 2021 remains unchanged at $19,500 for the solo 401(k). As previously mentioned, the employer component is subject to limitations based on earnings. Learn more about retirement planning for small business owners

SIMPLE IRA and SIMPLE 401(k) Contributions: Unchanged

Assuming the employee does not participate in another retirement plan, the maximum contribution to a SIMPLE IRA or SIMPLE 401(k) plan will remain unchanged at $13,500 in 2021. The catch-up contribution for those over age 50 remains unchanged at $3,000.

However, an employer may either make matching contributions or nonelective contributions to the plan. If the employer makes nonelective contributions, the covered compensation limit has increased to $290,000 in 2021.

Traditional IRAs: Unchanged

Note: income limits on deductible contributions have changed.

The annual contribution limit for traditional IRAs will remain $6,000 in 2021. The additional catch-up contribution for those over age 50 will not increase from $1,000. Just about any individual with earned income can contribute to a traditional IRA, however their additions may not be deductible. In 2021 the income phase-out bands that determine whether all (or a portion of) contributions are deductible will increase slightly. Learn more about traditional vs Roth IRAs.

The Deductible IRA Limits for 2021

Below are the limits for investors looking to make a tax-deductible IRA contribution in 2021. Note, even if your income exceeds the limits below, you can likely still make a non-deductible contribution up to $6,000, but be aware of the downsides.

If you/your spouse ARE covered by a retirement plan at work at any point during the year:

Tax Filing Status & Modified Adjusted Gross Income Limits

Deduction Single Married filing jointly
Full $66,000 or less $105,000 or less
Partial; deduction begins to phase out More than $66,000 and less than $76,000 More than $105,000 and less than $125,000
Non-deductible  Above $76,000 Above $125,000
 

If you/your spouse are NOT covered by a retirement plan at work during the year:

Tax Filing Status & Modified Adjusted Gross Income Limits

Deduction Single and married filing jointly (neither spouse covered) Married filing jointly – one spouse covered
Full Any $198,000 or less
Partial; deduction begins to phase out   More than $198,000 and less than $208,000
Non-deductible    Above $208,000

 

Roth IRAs: Unchanged

Note: income limits on regular contributions have increased, but not the maximum funding.

Like the traditional IRA, the contribution limits will stay the same in 2021, at $6,000 with a $1,000 catch-up contribution for investors 50 or older. The income phase-out limits will also increase: the phase-out range for single filers in 2021 is between $125,000 – $140,000 and for married couples filing jointly $198,000 – $208,000.

Defined Benefit Pension Plans: Unchanged

If you’re lucky enough to still have a pension, the annual benefit limit stays the same at $230,000 in 2021.

Health Savings Accounts (HSAs): Increase

Health savings accounts will see a minor increase in 2020 to the pre-tax contribution limit and annual out-of-pocket expense limit. The annual deductible floor for a plan to qualify as a high deductible health plan remains unchanged. To qualify to use a HSA you must have a high deductible health plan (HDHP).

HDHPs must have a minimum annual deductible of $1,400 for individual plans and $2,800 for family plans, which is unchanged from 2020. The maximum annual out-of-pocket expenses cannot exceed $7,000 for individual plans and $14,000 for family plans, an increase of $100 and $200, respectively, in 2021. 

In 2021, qualified participants may make pre-tax contributions to a health savings account (HSA) up to $3,600 for individual plans and $7,200 for family plans, or an increase of $50 and $100, respectively. Individuals age 55 or older can make catch-up contributions of $1,000 in 2021, which is unchanged from 2020. Learn more about HSAs.

Flexible Spending Accounts (FSAs): Unchanged

Employer-sponsored flexible spending accounts can have two components: a health FSA and/or a dependent care FSA. In 2021, annual contributions to a health FSA will stay the same at $2,750, though the maximum carryover increased $50 to $550. The dependent care FSA will remain unchanged at $5,000 for single parents or married couples filing jointly. Learn more about FSAs.

Social Security Taxable Wage Base: Increase

FICA taxes, also called payroll tax: there will be another large increase to the Social Security taxable wage base in 2021 as it rises 3.7% to $142,800, up from $137,700 in 2020. The Social Security tax rate remains unchanged at 6.2% for the employer and 6.2% for the employee. The Social Security (OASDI) tax is in addition to the 1.45% Medicare tax (HI) which does not have an earnings limit.

In addition, single individuals with income above $200,000 or $250,000 for married taxpayers will pay another .9% in Medicare taxes, which is unchanged from 2020.

Federal Estate and Gift Tax Exemption: Increase

The estate and gift tax exemption is $11.7 million in 2021, up from $11.58 million per person in 2020. For married couples, that’s a combined $23.4 million. The annual gift exclusion amount remains the same at $15,000 per person.

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