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2021 COLA Announcement: Impact on IRAs

SOME IRA LIMITS CHANGE for 2021

Each year, the amount you are permitted to contribute to an IRA or to deduct on your tax return for your contributions can change based on cost-of-living adjustments (COLAs), which are announced each fall by the IRS. For the 2021 tax year, some limits increased, and some did not.

 

Traditional and Roth IRAs – The annual IRA contribution limit remains at $6,000 for the third year in a row. However, the income limits for determining tax deductions for Traditional IRAs and eligibility to contribute to a Roth IRA increase for 2021.

 

IRA-based employer plans – The contribution limits for SIMPLE IRA plans did not increase, but the contribution limit and compensation thresholds for SEP plans did increase.

 

TRADITIONAL IRA 2021 2020 2019
Contribution limit $6,000 $6,000 $6,000
Catch-up contribution $1,000 $1,000 $1,000
Married active participant,

filing joint tax return

tax deduction phase-out range

$105,000–$125,000 $104,000–$124,000 $103,000–$123,000
Single active participant,

tax deduction phase-out range

$66,000–$76,000 $65,000–$75,000 $64,000–$74,000
IRA owner married to active participant, filing joint tax return

tax deduction phase-out range

$198,000–$208,000 $196,000–$206,000 $193,000–$203,000

 

ROTH IRA 2021 2020 2019
 

Contribution limit

$6,000 $6,000 $6,000
Catch-up contribution $1,000 $1,000 $1,000
Married, filing joint tax return                                                 eligibility phase-out range $198,000–$208,000 $196,000–$206,000 $193,000–$203,000
Single IRA owner                                                        eligibility phase-out range $125,000–$140,000 $124,000–$139,000 $122,000–$137,000

 

SEP IRA PLAN 2021 2020 2019
Minimum compensation $650 $600 $600
Maximum employer contribution $58,000 $57,000 $56,000
Compensation cap $290,000 $285,000 $280,000

 

SIMPLE IRA PLAN 2021 2020 2019
Maximum employee contribution $13,500 $13,500 $13,000
Catch-up contribution $3,000 $3,000 $3,000

 

 How the Traditional, Roth, SEP & SIMPLE IRA Limits Apply for 2021

 

Traditional IRA – The maximum amount you may contribute to an IRA for 2021 is the smaller of 100% of your compensation or $6,000. Traditional IRA contributions are fully deductible unless you or your spouse is covered by an employer’s retirement plan, such as a 401(k) plan. If you or your spouse is participating in an employer plan, the deductibility of your traditional IRA contributions will depend on whether your modified adjusted gross income (MAGI) exceeds the limits listed in the above chart. For example, if you are married, filing a joint tax return, and are participating in a 401(k) plan at work in 2021, your annual IRA contribution will be fully deductible if you and your spouse’s MAGI is under $105,000, and partially deductible if your MAGI is between $105,000 and $125,000. If your MAGI is $125,000 or higher, your Traditional IRA contributions will not be deductible.

Roth IRA – The maximum amount you may contribute to a Roth IRA for 2021 is the smaller of 100% of your compensation or $6,000. (All your Traditional and Roth IRA contributions combined must meet the $6,000 limit.) If you have MAGI above a certain level, you are not eligible to make a Roth IRA contribution for the year. For example, if you are married and filing a joint tax return for 2021, you may contribute the full amount to a Roth IRA if your MAGI is less than $198,000. If your MAGI is between $198,000 and $208,000, you may make a partial contribution. If your MAGI is $208,000 or higher, you cannot contribute to a Roth IRA for 2021.

Catch-up Contribution – If you are age 50 or older, you can make an additional $1,000 catch-up contribution between your Traditional and Roth IRAs for 2021.

SEP Plan – Only the employer sponsoring the SEP plan may make SEP plan contributions. The maximum contribution is the lesser of 25% of an employee’s compensation or $58,000 for 2021. Only compensation up to $290,000 can be considered for contribution calculations. Employees who earn less than $650 from the employer in 2021 may be excluded from the SEP plan.

SIMPLE IRA Plan Both employees and employers may make contributions to a SIMPLE IRA under an employer’s SIMPLE IRA plan. Employees may defer up to $13,500 for 2021, plus an additional $3,000 if the employee is age 50 or older. Employer contributions may either be matching contributions or nonelective contributions. Only compensation up to $290,000 can be considered for nonelective contribution calculations.

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