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2021 Tax and Retirement Plan Changes

Alex LaRosa

Investment Advisor Representative

November 18, 2020

Every year, the IRS evaluates and makes certain changes to adjust for inflation. Below is a list of which changes you can expect for 2021 for taxes, retirement contributions, and social security.

Retirement Contributions

  1. 401(k) and IRA contribution limits

The basic salary deferral amount for 401(k) and similar workplace plans remains flat at $19,500; the $6,500 catch-up amount if you’re 50 or older also remains the same.

IRA contribution limits are flat. The amount you can contribute to an Individual Retirement Account stays the same for 2021: $6,000, with a $1,000 catch-up limit if you’re 50 or older.

  • SEP IRA’s and SIMPLE 401(k)s

For the self-employed and small business owners, the amount they can save in a SEP IRA or a solo 401(k) goes up from $57,000 in 2020 to $58,000 in 2021. That’s based on the amount they can contribute as an employer, as a percentage of their salary; the compensation limit used in the savings calculation also goes up from $285,000 in 2020 to $290,000 in 2021. 

  • After Tax 401(k) contributions

If your employer allows aftertax contributions to your 401(k), you also get the advantage of the new $58,000 limit for 2021. It’s an overall cap, including your $19,500 (pretax or Roth in any combination) salary deferrals plus any employer contributions (but not catch-up contributions).

  • SIMPLE IRA

The contribution limit for SIMPLE retirement accounts is unchanged at $13,500 for 2021. The SIMPLE catch-up limit is still $3,000.

  • Defined Benefit Plans

The limitation on the annual benefit of a defined benefit plan is unchanged at $230,000 for 2021. These are powerful pension plans (an individual version of the kind that used to be more common in the corporate world before 401(k)s took over) for high-earning self-employed folks.

  • Deductible IRA Phaseouts

You can earn a little more in 2021 and get to deduct your contributions to a traditional pretax IRA. Note: Even if you earn too much to get a deduction for contributing to an IRA, you can still contribute—it’s just nondeductible.

In 2021, the deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $66,000 and $76,000, up from $65,000 and $75,000 in 2020. For married

couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $105,000 to $125,000 for 2021, up from $104,000 to $124,000.

  • ROTH IRA Phaseouts

The inflation adjustment helps Roth IRA savers too. In 2021, the AGI phase-out range for taxpayers making contributions to a Roth IRA is $198,000 to $208,000 for married couples filing jointly, up from $196,000 to $206,000 in 2020. For singles and heads of household, the income phase-out range is $125,000 to $140,000, up from $124,000 to $139,000 in 2020.

Tax Changes

The standard deduction for 2021 will be $25,100, an increase of $300, for married couples filing joint returns; $12,550, an increase of $150, for single taxpayers’ individual returns and married individuals filing separately; and $18,800, an increase of $150, for heads of households. 

The additional standard deduction amount for an individual who is aged or blind will be $1,350; however, if the individual is unmarried and not a surviving spouse, the amount will be $1,700.

The standard deduction for an individual who can be claimed as a dependent on another taxpayer’s return cannot exceed the greater of (1) $1,100, or (2) $350 plus the individual’s earned income (but not more than the regular standard deduction, $12,550). 

Social Security

Based on the increase in the Consumer Price Index (CPI-W) from the third quarter of 2019 through the third quarter of 2020, Social Security and Supplemental Security Income (SSI) beneficiaries will receive a 1.3 percent COLA for 2021.

The earnings limit on which an individual is taxed for social security has also been raised from $137,700 to $142,800 in 2021.

If you have any questions about these changes or would like to discuss how they could impact your personal plan, give us a call at 610-825-3540

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2021 Tax and Retirement Plan Changes

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