Retirement Updates: 2021 IRA & 401(k) Contribution Limits

Every year the Internal Revenue Service (IRS) reviews inflation and other factors to determine the contribution limits for tax-advantaged retirement plans. Some years they remain unchanged. But other years, the IRS increases the amount you can set aside in your 401(k) and Individual Retirement Account (IRA).

Here’s what you need to know about 401(k) and IRA contribution limits for 2021 and how you can make the most of your retirement savings.

2021 Contribution Limits for 401(k)s and IRAs

For the coming year, the IRS has left the contribution limit on your 401(k) the same at $19,500. This contribution limit also applies to 403(b) and most 457 plans, as well as government Thrift Savings Plans. The catch-up contribution, available to those 50 and older, remains at $6,500.

For IRAs, the 2021 contribution limit remains the same at $6,000 per year. Remember that the contribution limit applies to all your combined IRA accounts, so if you have a Roth IRA as well as a traditional IRA, your combined contributions to both accounts can’t exceed $6,000. The catch-up contribution for those 50 and older remains the same at $1,000.

What You Need to Know About IRA Income Restrictions

One of the benefits of a traditional IRA is that you can typically deduct your contributions. However, if you have a retirement plan at your work, or if your spouse does, the ability to deduct your IRA contributions phases out depending on your income and filing status. When you reach a certain income level, you can still take a deduction, but not the full amount. After you reach the upper phaseout limit, you can’t claim a deduction at all for IRA contributions.

In 2021, even though the contribution limit hasn’t changed, the income restrictions have increased slightly for the deduction phaseout:

• Single taxpayers: Phaseout begins at $66,000 and completes at $76,000
• Married taxpayers, spouse with workplace plan making contributions: Phaseout begins at $105,000 and completes at $125,000
• Married taxpayers, spouse has workplace plan, contributor does not: Phaseout begins at $198,000 and completes at $208,000

If you have a plan from your workplace, most likely a 401(k), you have a better chance to claim a deduction for contributions to an IRA, providing a greater incentive to use more than one type of tax-advantaged retirement account.

It’s important to note the income limits for Roth IRA contributions have also increased slightly for 2021. You can contribute to a Roth IRA with income phaseouts based on your income and filing status.

• Single or head of household: $125,000 to $140,000
• Married filing jointly: $198,000 to $208,000

If you’re married and filing separately, the income phaseout range for making Roth IRA contributions remains zero to $10,000.

IRA and 401(k) Contribution Limits 2021: Taking Full Advantage

Because the 2021 IRA and 401(k) contribution limits are the same as last year, if you’re already maxing out your accounts, you won’t be able to add more to your retirement. However, if you turn 50 this year, you can increase what you put into your retirement accounts by taking advantage of catch-up contributions. If you’re at least 50 and haven’t been using catch-up contributions, now might be a time to consider using them to grow your portfolio.

If you aren’t maxing out your retirement account contributions, you do have room to increase what you set aside. Consider speaking with your human resources department about having a little more taken out of each paycheck and diverted to a 401(k) or IRA. Although it might not seem like much today, when compound returns are figured over the course of decades, the extra boost could make a significant difference to your overall portfolio.

Another strategy, if you qualify, is to consider contributing to a Health Savings Account (HSA) to take advantage of those tax benefits. Additionally, when used as part of a retirement strategy, your HSA can help you pay for health care costs or even serve as a backup IRA when you reach age 65.

Managing Your Overall Retirement Strategy

Consider speaking with a retirement consultant about how you can make the most of your future based on the types of accounts you contribute to. In some cases, a strategy that uses both traditional and Roth accounts, in addition to a 401(k), can increase the overall tax efficiency of your retirement portfolio. A holistic approach can help you make sure your retirement goals fit with your other financial objectives, and a retirement professional can sit down with you and give you an outside perspective that keeps you on track.