2021 Retirement Account Contribution Limit Updates

(4 minute read)

Did you know you can sell all or a portion of a life insurance policy, even term insurance?

The IRS has announced updates to the contribution limits placed on retirement accounts for 2021. While this doesn’t happen for every type of plan every year, this year brings with it several changes that will impact anybody planning for retirement with a 401(k) or IRA. Let’s take a quick look at this year’s changes.

2021 401(k) Contribution Limits

For most employees, the total contribution limit for 401(k) accounts has increased to $19,500 in 2021, up $500 from 2020’s limit of $19,000. For workers age 50 years or older, there’s an additional $6,500 allowed in catch-up contributions for a combined total of $26,000. This catch-up contribution rate is the same as it was in 2020. These numbers apply only to the savings an employee puts into their own retirement accounts.

In addition, employers can make contributions in an employer match or profit-sharing arrangement. Including both employee and employer contributions, the total contribution limit for a 401(k) account in 2021 is $58,000 (or $64,500 with catch-up contributions for employees 50 or older). Note that total contributions are limited to $58,000 or 100% of an employee’s salary, whichever is higher—so if an individual makes $50,000 per year, they will not be able to save more than $50,000 between their own contributions and any contributions made on their behalf by their employer.

For more information about 401(k) contribution limit increases, read this article from Fisher Investments.

Finally, the limits for the saver’s tax credit have also increased. The saver’s tax credit allows you to take a non-refundable tax credit for up to 50% of your total eligible contributions into an employer-sponsored retirement plan like a 401(k). In order to claim this credit, the maximum income cap for married couples filing jointly has increased to $66,000, for heads of household to $49,500, and for individuals to $33,000. The amount you can claim also depends on your income; for example, this credit is worth 50% for married couples filing jointly who earn $39,500 or less. That goes down for 20% for couples who earn between $39,501 and $42,000, and down to 10% for those who earn between $42,001 and $66,000 before disappearing completely at or above $66,000.

For a more detailed look at the saver’s tax credit, including a breakdown of credit rates depending on income and filing status, review the chart on this blog post from Investopedia.

Contribution limits to SIMPLE 401(k) plans in 2021 remains at $13,500, unchanged from 2020.

2021 IRA Contribution Limits

The IRS has not changed the overall contribution limit for individual retirement accounts (IRAs) in 2021. Just as in 2020, the most an individual can contribute to an IRA is $6,000.

However, the eligibility requirements have changed. As your income increases, the percentage of your IRA contributions you can deduct from your taxes decreases before phasing out entirely. To quote the IRS directly, the following are the income limits for different types of filers both covered by an employer-sponsored retirement plan and not:

  • 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, where the spouse making the IRA contribution is covered by a workplace retirement plan, 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 a married individual filing a separate return 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.

For more information about these phase-out ranges, as well as special rules for Roth IRAs, review the IRS guidance on IRA contribution limits.

Note that the same Saver’s Credit limits apply to IRAs as 401(k) accounts.

Maximize Retirement Savings with Life Settlement Advisors

If you are working towards your retirement years or are a financial advisor representing retirement-age clients, it’s critical to explore every avenue for increasing retirement savings and their power to grow through wise investments. If you are finding that you are limited by the standard contribution limits on 401(k) plans and IRAs, don’t overlook the potential of financial assets like life insurance policies.

Did you know you can sell all or a portion of a life insurance policy, even term insurance? Selling an unwanted life insurance policy is no different than selling your car, home or any other valuable asset that will create immediate cash. Contact us today to learn more.

Leo LaGrotte
Life Settlement Advisors
llagrotte@lsa-llc.com
1-888-849-0887

Leave a Reply

Your email address will not be published. Required fields are marked *