How Much Can I Contribute to My 401(k), IRA or HSA in 2021
Author: Nick Prigitano
It's just about the time of year when many people begin to experience the holiday rush. Believe it or not, Thanksgiving is only a couple weeks away, and Christmas a mere four weeks after that! During this time, many people will be excited for the upcoming days off from work and the time to reconnect with friends and family (although it may be digitally this year).
For us financial planners, we get excited around this time for a completely different reason . . . IRS announcement of inflation increases! Around this time the IRS will announce which retirement savings accounts get an increase (if any) allowing hard working Americans to sock away more money for their retirement savings goals. This year's changes aren't as robust as they have been in others, but there are still some additional savings opportunities to take note of for some retirement savings accounts.
401k Increase? Not this year
The primary retirement savings vehicle for many Americans is the 401k offered by their employer. Last year we saw increases to both the regular contribution limits and the catch-up limits for those 50 and older. Unfortunately for 2021, these contribution limits will remain the same at $19,500 with an additional $6,500 ($26,000 total) for those 50 and older.1
What this means is that if you are already maxing out your 401k you do not need to make any changes to the amount you are putting toward your 401k. The only adjustment you may need to make is if you experienced a pay increase (or hopefully not a decrease!) you may want to adjust the percentage withholding to better spread out your contributions throughout the entire year.
IRA Increase? Again, no :(
Unfortunately, there was no increase of the contribution limit for IRAs in 2021. It remains at $6,000 with a $1,000 catch-up for those 50 or older. However, what did increase slightly is the income limit eligibility for Roth contributions. In order to be eligible to contribute to a Roth IRA, your adjusted gross income (AGI) on your tax return needs to be low enough.
In 2020 you were able to make a full contribution if your income was $196,000 or lower for married filers ($124,000 for single). The amount you can contribute would decrease and would fully be eliminated if your AGI was at or above $206,000 if filing married ($139,000 for single). In 2021 these income bands will increase to $198,000 - $208,000 for joint filers ($125,000 - $140,000 for single). It's only a slight increase, but depending on your income situation going into the new year, you may be eligible (or now ineligible) to contribute to a Roth in 2021.
It's important to note that for IRA accounts you have until the tax filing deadline (April 15th, 2021) to make a contribution for 2020. If you are on the cusp of possibly being able to make an IRA contribution you can wait until you have your entire tax picture and make the contribution in early 2021 for this year. This is NOT true for 401k retirement accounts. If you're trying to max out that account, you need to make sure you make the appropriate paycheck deductions with your employer through the end of this year.
What about HSAs? Yes!
Although IRAs and 401k contribution limits will not increase next year, HSA contributions will! The increase is small, from $7,100 to $7,200 for family plans ($3,550 to $3,600 for individual).2 It's not a huge increase from last year, but it's better than nothing. Especially considering the HSA is one of the best retirement savings accounts because of its triple tax benefits.
While the contribution limit for regular contributions has increased, the catch-up contribution for those 55 and older will not. That will still be $1,000 in 2021.
When it comes to Social Security there are two limits that are considered. First, for those collecting, how much your monthly benefit will increase for inflation. For those still working, there is a maximum tax amount where your income is no longer taxed for Social Security over a certain amount. Regular income taxes and Medicare taxes will still apply, but Social Security will phase out.
It's not an enormous increase, but many retirees who rely on Social Security will see a 1.3% increase in their monthly benefit from Social Security.3
The income limit where Social Security taxes are withheld also increased to $142,800 per taxpayer.3 Your wages above that amount will not be subject to Social Security taxes.
While we didn't see many retirement plan increases this year, there were some. These increases are typically tied to inflation, so depending on what happens in 2021, we may see more increases in 2022. If you need assistance with your retirement planning please reach out to one of our qualified financial advisors.