On October 26th, 2020, the Internal Revenue Service (IRS) announced specific cost-of-living adjustments for tax year 2021 contributions. This blog post covers the adjustments that affect dollar contribution limitations for pension plans and other retirement-related items. All information is part of the latest IRS guidance Notice 2020-79. The release of Notice 2020-79 comes just weeks after the IRS extended Affordable Care Act (ACA) reporting deadlines.
The biggest change is the increase to income ranges for determining eligibility to make deductible contributions for 2021. These include contributions to traditional Individual Retirement Arrangements (IRAs) and Roth IRAs. There was also an increase in the income range needed to claim the 2021 Retirement Savings Contributions Credit (Saver’s Credit).
Phase-Out Ranges
Taxpayers can deduct contributions to a traditional IRA at work if they meet certain conditions. If during the year the taxpayer (or spouse) had a retirement plan, they might see a reduced deduction. This would occur until the elimination of the deduction, depending on filing status and income. (If the taxpayer or spouse are not covered by a retirement plan, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2021:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is $66,000 to $76,000. The previous range was $65,000 to $75,000.
- For married couples filing jointly, if the spouse making contributions has a retirement plan, the phase-out is $105,000 to $125,000. This range is up from the previous range of $104,000 to $124,000.
- For an IRA contributor who is not covered by a workplace retirement plan, and married to a covered individual, the deduction phases out if the couple’s income ranges between $198,000 and $208,000. The previous range was $196,000 to $206,000.
- Married individuals filing a separate return covered by a workplace retirement plan are not affected. That phase-out range in that situation is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
Roth IRAs and Saver’s Credit Limits
The income phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000. The range covers both singles and heads of household, 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. Meanwhile, the phase-out range for a married individual filing a separate return, making contributions to a Roth IRA has not changed. It is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
Saver’s Credit limits for low- and moderate-income workers are:
- $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
Notice 2020-79 also includes the following information about other employee contribution programs:
- Limits on employee contributions to 401(k), 403(b), most 457 plans, and the U.S.’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 catch-up contribution limit for individuals aged 50 and over is not subject to a cost-of-living adjustment and remains $1,000.
Employer Takeaways
Employers who offer retirement benefits should determine if they need to update their plans based on the latest limits. Any changes to retirement plans need to also be properly communicated to employees. If there are questions about the recent updates, employees should consult with their benefit plan administrator to ensure proper compliance.