Key employee contribution limits remain unchanged. 

The IRS announced on October 26, 2020, new cost-of-living adjustments affecting dollar limitations for pension plans for 2021. Remaining unchanged for 2021 are the limitation on the annual benefit under a defined benefit plan, limits on IRA contributions, the limitation on the exclusion for elective deferrals and the catch-up contribution limit for employees aged 50 and over who participate in qualified retirement plans ($230,000; $6,000; $19,500; and $6,500, respectively). The income ranges for determining eligibility to make deductible contributions to traditional IRAs, to contribute to Roth IRAs and to claim the saver’s credit all increased for 2021.

Highlights of Changes for 2021

The income ranges for determining eligibility to make deductible contributions to traditional individual retirement arrangements (IRAs), to contribute to Roth IRAs and to claim the saver’s credit all increased for 2021. Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phaseouts of the deduction do not apply.)

Here are the new phaseout ranges for 2021:

• For single taxpayers covered by a workplace retirement plan, the phaseout 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 phaseout 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 phaseout range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The income phaseout range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household, up from $124,000 to $139,000. For married couples filing jointly, the income phaseout range is $198,000 to $208,000, up from $196,000 to $206,000. The phaseout 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.

The income limit for the saver’s credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $66,000 for married couples filing jointly, up from $65,000; $49,500 for heads of household, up from $48,750; and $33,000 for singles and married individuals filing separately, up from $32,500.

Key employee contribution limits remain unchanged. The limit on contributions by employees who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $19,500. The catch-up contribution limit for employees aged 50 and over who participate in these plans remains unchanged at $6,500. The limitation regarding SIMPLE retirement accounts remains unchanged at $13,500. The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catchup contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000. Details on these and other retirement-related cost-of-living adjustments for 2021 are in Notice 2020-79, available on IRS.gov.

TAG’s Perspective

In today’s uncertain and challenging times, one of the most important personal tax and financial planning activities to undertake is planning adequately for retirement. Social Security should no longer be relied upon as a major source of retirement income. Having access to a tax deferred and tax free retirement account can significantly reduce your tax burden currently (or in retirement) and minimize your tax obligations when distributions commence down the road, when you will likely be in a lower tax bracket. The significant compound effect of funding retirement accounts over time will provide for greater security in retirement years.

For More Information

If you would like more information about this topic or your own unique situation, please contact Michael A. Gillen, Steven M. Packer, any of the practitioners in the Tax Accounting Group or the practitioner with whom you are regularly in contact. For information about other pertinent tax topics, please visit our publications page.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.