IRA Contribution Limits 2020 – 2021: What Changed?

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New contribution limits for 2021 are out— and they are some differences from the 2020 limits.
Want the lowdown on these updates? Here’s how much you can save for retirement in summary:

Traditional IRA & Roth IRA Contributions

The contribution limit for 2021 remained at $6,000 per year for both Traditional and Roth IRAs. Catch up contributions will remain $1,000, so if you are over 50 you can contribute up to $7,000 a year. Traditional IRAs allow for tax-deductions upfront with deferred taxes— meaning you don’t pay taxes until the money comes out of the account. But the IRS wants those taxes eventually, so you’ll pay these when you take distributions at retirement.

Roth IRAs are post-tax, meaning you’ve already paid taxes on the money before you contributed to your IRA. Since you’ve already paid taxes on these funds, you may not owe taxes when distributing funds, and aren’t required to take RMDs. Your investment gains are in a post-tax environment.

SEP IRA Contribution Limits

SEP contributions are limited to 25% of compensation or the maximum cap for the year (the lesser of the two amounts). The contribution limit for SEP IRAs for 2021 is capped at $58,000. This is an additional $1,000 compared to 2020 ($57,000). 

SEP IRAs are plans for small business owners (with one or more employees), or anyone that is self-employed. They have different deadlines and higher contribution limits compared to Traditional and Roth IRAs. This makes them especially attractive for self-directed investors (especially real estate agents), since you can start investing tax-deferred at a faster rate. Contributions are made by the employer, and employees can’t directly contribute to the plan. The employer must contribute the same amount for all employees, including yourself— but the benefits can be huge due to the higher contribution limits.

SIMPLE IRA Contribution Limits

SIMPLE IRA contributions for 2021 remain the same at $13,500. There were no changes made to catch up contribution limits, which remain at $3,000.

SIMPLE IRAs are for employers with 100 or fewer employees, but unlike the SEP IRA, they allow for employee contributions to the plan. It’s a low-hassle, low-cost plan to establish and maintain, and with a self-directed SIMPLE IRA, employees can invest their retirement their way.

Self-Directed IRA Contribution Limits

SEP IRA Contribution Limits

ELIGIBILITY

Self-employed individuals or small business owners, including those with employees: Sole proprietors, Partnerships, C corporations, S corporations

CONTRIBUTION LIMITS

25% of compensation or maximum cap for the year (the lesser amount)

2020 max: $57,000

2021 max: $58,000
Each eligible employee must receive the same percentage
Contributions are not mandatory

HIGHLIGHTS

Tax-deferred— so you don’t pay taxes until withdrawn at retirement

Tax-deductible contributions

Easy to set up and maintain

Funded by employer contributions only

CONTRIBUTION DEADLINE

May 17, 2021 or
Your tax-filing
deadline, including extensions for the prior year

SIMPLE IRA Contribution Limits

 

ELIGIBILITY

Businesses with 100 or fewer employees: Sole proprietors, Partnerships, C corporations, S corporations

Participating employees must have earned at least $5,000 in compensation during any 2 years preceding

CONTRIBUTION LIMITS

Employer: mandatory 3% matching contribution or 2% non-elective contribution

Participants contributions

2020: Up to $13,500 in salary deferrals ($16,500 if age 50 or older)

2021: Up to $13,500 in salary deferrals ($16,500 if age 50 or older

HIGHLIGHTS

Tax deferred— so you don’t pay taxes until withdrawn at retirement

Employer contributions
are deductible as business expenses

Funded by employee deferrals and employer contributions

CONTRIBUTION DEADLINE

Employees: No later than 30 days after the month in which deferred

Employer: Employer’s tax filing deadline (including extensions)

Self-employed (with no common-law employees): January 30

ROTH IRA Contribution Limits

 

ELIGIBILITY

No age limit

Must have earned income

CONTRIBUTION LIMITS

2020: $6,000 ($7,000 if age 50 or older)

2021: $6,000 ($7,000 if age 50 or older)
Contributions are not
tax-deductible

HIGHLIGHTS

Earnings can grow tax-free

Taxes are paid up front, so you’re able to withdraw your contributions tax-free and penalty-free at any time

CONTRIBUTION DEADLINE

May 17, 2021 to make contributions for the prior calendar year

Traditional IRA Contribution Limits

 

ELIGIBILITY

No age limit

Must have earned income

 

CONTRIBUTION LIMITS

2020: $6,000 ($7,000 if age 50 or older)


2021: $6,000 ($7,000 if age 50 or older)

HIGHLIGHTS

Tax-deductible contributions based on Modified Adjusted Gross Income (MAGI)

CONTRIBUTION DEADLINE

May 17, 2021 to make contributions for the prior calendar year

 

Other Changes to Retirement Plans

There were a few other changes for retirement plans. These changes may impact your investment strategy, so you may want to discuss with a financial advisor if you have detailed questions.

Retirement Age

Previously you were required to take a Distribution at the age of 70 ½ . The new age for Required Minimum Distributions (RMD) is 72. It is still 70 ½ if you reach 70 ½ before January 1, 2020.

Tax Extension Deadline 2020 & IRA Contributions

The tax filing due day was extended from April 15, 2021 to May 17, 2021. The IRA contribution deadline for the tax year 2020 was also extended to May 17, 2021.

Coronavirus Related Distribution

A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs. Learn more

Modified Adjusted Gross Income (MAGI)

Modified adjusted gross income (MAGI) is an important number. First of all, it determines whether you can contribute to a Roth IRA and if you can deduct contributions to a Traditional IRA. We recommend that you consult with a tax advisor to determine if you qualify for a partial deduction or full deduction. These income ranges all increased for 2021.

MAGI Changes for 2021

Traditional IRAs

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is $66,000 to $76,000, up from $65,000 to $75,000.
  • For married couples filing jointly tax returns, where the spouse making the IRA contribution is covered by a retirement plan at work, the phase-out range is $105,000 to $125,000, up from $104,000 to $124,000.
  • 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.
  • For married filing separately, who is 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.

Roth IRAs

  • 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, is up from $124,000 to $139,000.
  • For married couples filing jointly, the income phase-out range is $198,000 to $208,000, up from $196,000 to $206,000.
  • The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

In a Nutshell

Bigger contributions mean there’s more opportunity to invest and to grow your retirement wealth— Especially for self-directed IRA investors. The industry has been clamoring for a change, something to encourage greater retirement savings for a world that requires so much more than it used to in your golden years— and maybe this is a step in the right direction. If you have questions about the tax implications of these changes by the IRS, please consult a tax advisor.

 

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