Retirement Plan Contribution Limits 2021

With the new year upon us, it’s a good time to be sure you understand the contribution limits for various retirement plan options so you can contribute as much as possible. As you look at your financial planning for 2021, you will want to maximize your retirement contributions to meet your retirement savings goals. Retirement plan contribution limits for 2021 didn’t increase by a lot, or at all in some cases, over the limits for 2020.

Here are the 2021 retirement plan contribution limits for some popular retirement savings options.

401(k) 

The contribution limits for 2021 remain at:

• $19,500
• $26,000 for those who will be 50 or over at any point during the year, including a $6,500 catch-up contribution.

These same limits apply to those of you who have access to a 403(b) plan via your employer.

The limits are slightly different for 457(b) plans offered by some governmental entities and other non-profits. The basic contribution limits are the same as for the 401(k) and the 403(b). However, for participants who have not contributed the maximum amounts in prior years, there is a special catch-up contribution limit that increases to a maximum of $39,000 in 2021 for those within a few years of the plan’s retirement age. If this describes your situation check with the plan administrator to see if you are eligible.

Health Savings Accounts

Health savings accounts (HSA) are another option that is increasingly being used as a retirement savings vehicle and should be considered by those of you who are eligible via participation in a high-deductible medical insurance plan.

For 2021, high-deductible medical plan is one with deductibles of at least:

• $1,400 for individuals
• $2,800 for a family

The maximum out-of-pocket amounts for participants in a high-deductible plan for 2021 increase slightly to:

• $7.000 for individuals
• $14,000 for a family

The maximum HSA contribution rates are:

• $3,600 for an individual
• $7,200 for a family
• There is a $1,000 additional catch-up contribution available for those age 55 or over

An HSA is a great way to save for retirement medical costs as the money deferred can be carried over from one year to the next. Once you retire, the money can be used for either qualified medical expenses or treated like an IRA. Contributions are made on a pre-tax basis, withdrawals for qualified medical expenses are tax-free.

While you can use the money to reimburse yourself for covered medical and dental costs at any point in time, the real power of an HSA is the ability to use the money as an additional retirement savings vehicle. The key is to cover any out-of-pocket medical costs from other sources while you are working.

IRA 

The total contribution limits for IRAs remain unchanged from 2020:

• $6,000
• An additional $1,000 catch-up contribution for those who will be 50 or over at any point during 2021.

These contribution limits are totals for contributions across both traditional and Roth IRAs, as well as for both pre-tax and after-tax contributions.

Here are some additional IRA limits/rules to be aware of in 2021:

Roth IRA contribution limits and phase-outs 

If your filing status is single:

• The phase-out in the amount that can be contributed begins at an income level of $125,000.
• The phase-out range extends to $140,000 no Roth IRA contributions can be made at income levels above this.

If your filing status is married filing jointly (or you are a qualified widow or widower):

• The phase-out in the amount that can be contributed begins at an income level of $198,000.
• The phase-out range extends to $208,000 no Roth IRA contributions can be made at income levels above this.

As an example of how the phaseout works, a single filer with income of $132,500 could contribute $3,000 to a Roth IRA or $3,500 if they are 50 or over. This person can still contribute the full $6,000 or $7,000 maximum to an IRA, the remainder would need to be made to a traditional IRA on an after-tax basis.

Income in this case is based upon modified adjusted gross income (MAGI) which is a modified version of the adjusted gross income (AGI) figure found on your tax return.

Traditional IRA pre-tax contribution income limits 

For those of you who are covered by a workplace retirement plan (whether or not you contribute) such as a 401(k), there are income limits above which you can’t make a pre-tax contribution. For 2021 those income limits are:

If your filing status is single:

• The phase-out in the amount that can be contributed on a pre-tax basis begins at an income level of $66,000.
• The phase-out range extends to $76,000; no pre-tax IRA contributions can be made at income levels above this.

If your filing status is married filing jointly (or you are a qualified widow or widower):

• The phase-out in the amount that can be contributed begins at an income level of $105,000.
• The phase-out range extends to $125,000; no pre-tax IRA contributions can be made at income levels above this.

If you are not covered by a retirement plan at work, then there are no income limits restricting your ability to contribute to a traditional IRA on a pre-tax basis.

If you are not covered by a workplace retirement plan, but your spouse is, the phase-out limits for pre-tax contributions start at $198,000 and extend to $208,000.

For those whose income may limit or eliminate their ability to contribute on a pre-tax basis, you are still eligible to contribute to a traditional IRA on an after-tax basis. You can mix and match between traditional and Roth IRA contributions, as well as between pre and post-tax contributions within the $6,000/$7,000 maximums for total IRA contributions.

SIMPLE IRA

A SIMPLE IRA plan is a business retirement plan that offers less administrative and paperwork burdens for small business with 100 or fewer employees. Self-employed individuals can also use a SIMPLE IRA.

For 2021, the contribution limits remain at $13,500, with those who are 50 or over eligible to contribute an additional $3,000. In addition, there is a mandatory employer contribution of either a 3% match or a 2% non-elective contribution. 

Self-employed retirement plans 

Solo 401(k) plans 

Solo 401(k) plans are available to a business owner, their spouse who works in the business and to any partners in the business. Solo 401(k) plans cannot include any other employees and are not the right choice for businesses with employees.

The contribution limits for 2021 for solo 401(k) plans are:

• The same $19,500/$26,000 employee contribution limits as a regular 401(k) plans.
• The maximum combined employer and employee contributions for 2021 are $58,000 and $64,500 for those 50 and over. The employer profit sharing contribution is based on a maximum of 25% of compensation up to the total $58,000/$64,500 limits.

SEP-IRA 

Contributions to a SEP-IRA are made by the employer only. Employee deferrals are not permitted. While a SEP-IRA plan can include employees, as a practical matter these plans can get expensive if employees are included.

Contribution limits for 2021 are:

• The lesser of 25% of compensation or $58,000. There are no catch-up contributions for those who are 50 or over.

Note there are other options for the self-employed including a small-business 401(k) and a defined benefit pension plan depending upon your situation, including your business’ size, cash flow and other factors. 

The Bottom Line

Here are the retirement plan contribution limits for 2021 for these popular retirement savings options. They are all solid vehicles to help you accumulate a retirement nest egg. This is the time to look at your situation, decide how much you can contribute, and which options fit your situation. Studies have shown that the biggest determinant of the size of your retirement nest egg is the amount that you’ve saved.

What are you waiting for? The best time to start saving for retirement (or to increase your retirement contributions) is today.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed advice about your situation.

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