Traditional and Roth IRA
The maximum amount you can contribute to a traditional or Roth (subject to eligibility) IRA was unchanged from 2020 and remains $6,000 in 2021. Those age 50 and older may make an additional catch-up contribution of up to $1,000. For the year 2020 and later, there is no age limit on making regular contributions to traditional or Roth IRAs.
You must have taxable compensation to contribute to an IRA. If you earned less than $6,000 of taxable compensation, you may contribute 100% of your taxable compensation up to $6,000. If you are married and file a joint return, you may be able to contribute to an IRA even if you didn’t have taxable compensation as long as your spouse did. Each spouse can make a contribution up to the current limit; however, the total of your combined contributions can’t be more than the taxable compensation reported on your joint return.
You can contribute to both a traditional IRA and a Roth IRA in 2021, but your total contributions cannot exceed the annual limit of $6,000 (or $7,000 if age 50 or over).
Eligibility To Contribute To Roth IRA
Your eligibility to contribute to a Roth IRA is dependent on your modified adjusted gross income (MAGI) and tax filing status. If your filing status is single or head of household, you can contribute the full $6,000 ($7,000 if you are age 50 or older) to a Roth IRA if your MAGI is $125,000 or less. If you’re married and filing a joint return, you can make a full contribution if your MAGI is $198,000 or less. For those with MAGI in excess of these amounts, your eligibility to make a contribution is phased out as set forth below:
|Federal Tax Filing Status||Contribution Limited||Contribution Ineligible|
|Single or Head of Household||MAGI $125,000 to $139,999||$140,000 or more|
|Married Jointly / Widow(er)||MAGI $198,000 to $207,999||$208,000 or more|
|Married Filing Separately||MAGI $1 to $9,999||$10,000 or more|
Deduction of IRA Contributions:
Contributions to a Roth IRA are not tax deductible. However, contributions by yourself and a spouse to a traditional IRA may be fully or partially deductible depending upon income and whether you and/or your spouse are eligible to be an “active participant” in an employer sponsored retirement plan. While most recognize a 401(k) or 403(b) as an employer sponsored retirement plan, IRA-based plans such as the SEP IRA and SIMPLE IRA are also employer sponsored retirement plans. If contributions are being made to your account for any of these plans, you would be considered an active participant in an employer sponsored retirement plan.
Single (or Both Spouses) and NOT Active Participant in Employer Sponsored Retirement Plan
If you (and if you’re married, both you and your spouse) are not covered by an employer sponsored retirement plan, contributions to a traditional IRA by yourself and/or your spouse are generally fully tax deductible.
Married and One Spouse Active Participant in Employer Sponsored Retirement Plan
If you’re married, filing jointly, and you’re not covered by an employer sponsored retirement plan but your spouse is, you may still be able to deduct your traditional IRA contribution depending on your combined MAGI.
|$1 up to $197,999:||Contribution fully deductible|
|$198,000 up to $207,999:||Deduction is limited|
|$208,000 or more:||Contribution not deductible|
Single (or Both Spouses) Covered By Employer Sponsored Retirement Plan
For those individuals or married couples who are both an active participant in an employer sponsored retirement plan, deductibility depends on MAGI and filing status.
|Federal Tax Filing Status||Deduction Limited||Deduction Ineligible|
|Single or Head of Household||MAGI $66,000 to $75,999||$76,000 or more|
|Married Jointly / Widow(er)||MAGI $105,000 to $124,999||$125,000 or more|
|Married Filing Separately||MAGI $1 to $9,999||$10,000 or more|
As demonstrated in the chart above, if your filing status is single or head of household, you can fully deduct your IRA contribution up to $6,000 ($7,000 if you are age 50 or older) in 2021 if your MAGI is $66,000 or less (up from $65,000 in 2020). If you’re married and filing a joint return, you can fully deduct up to $6,000 ($7,000 if you are age 50 or older) if your MAGI is $105,000 or less (up from $104,000 in 2020).
Employer Retirement Plans
Maximum Contribution (contributions of you and your employer):
The maximum amount that can be allocated to your account in a defined contribution plan, such as a 401(k) or profit-sharing plan, in 2021 is $58,000 (up from $57,000 in 2020) plus age 50 or older catch-up contributions, discussed below. This includes both your contributions and your employer’s contributions.
SEP plans only allow employer contributions. For a self-employed individual, contributions are limited to 25% of your net earnings from self-employment (not including contributions for yourself), up to $58,000. You can calculate plan contributions using the tables and worksheets in IRS Publication 560. If your business sponsors another defined contribution plan in addition to your SEP plan (for example, a profit-sharing plan or a 401(k) plan), then your contributions for yourself to all these plans may not exceed 25% of your net earnings from self-employment (not including contributions for yourself), up to $58,000 (for 2021; $57,000 for 2020). Note that salary deferrals are not subject to the 25% limit and catch-up contributions are not included in the $58,000 limit.
Elective Deferrals (your contributions):
Most of the contribution limits that apply to employer sponsored retirement plans for 2021 remain unchanged from 2020. The maximum amount you can contribute (your “elective deferrals”) to a 401(k) plan remains $19,500 in 2021. This limit also applies to 403(b) and 457(b) plans, as well as the Federal Thrift Savings Plan (TSP). If you’re age 50 or older, you can make additional catch-up contributions of up to $6,500 to these plans in 2021, subject to special provisions in 403(b) and 457(b) plans discussed below. The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) remains $13,500 in 2021, and the catch-up limit for those age 50 or older remains $3,000.
Restrictions and Special Provisions That Apply To Elective Deferrals:
- Contributions can’t exceed 100% of your income.
- Participation in Multiple Plans: If you participate in more than one 401(k), 403(b), or SIMPLE retirement plan, the total amount you contribute (elective deferrals) to all plans can’t exceed the annual limit plus any applicable catch-up contribution. Deferrals to Section 457(b) plans are not subject to this restriction. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can defer the full dollar limit to each plan — a total of $39,000 in 2021 (plus any catch-up contributions).
- 15 Years of Service Catch-up: If permitted by the plan, an employee who has at least 15 years of service with the same eligible 403(b) employer has a 403(b) elective deferral limit that is increased by up to an additional $3,000. The IRS provides the following example:
Example: Assume Pat, age 50, has worked as a teacher in the XYZ School District for 15 years; is eligible for the 15 years of service catch-up; and has eligible compensation of $70,000 for 2020. The maximum employee and employer contributions to the XYZ 403(b) plan for 2020 for Pat would be $63,500 ($57,000 annual addition + $6,500 age 50 catch-up):
- Pat made elective salary deferrals to the 403(b) plan in 2020 totaling $22,500 ($19,500 plus $3,000 15 years of service catch-up)
- An employer contribution of $34,500, brings the total employee and employer contributions to $57,000, the annual additions limit in 2020.
- Pat may also defer an additional $6,500 age 50 catch-up contribution in 2020.
- Special Catch-Up for 457(b) Participants: If permitted by the plan, a participant may contribute up to twice the annual elective deferral contribution limit ($39,000 in 2021) for the three years prior to normal retirement age as defined in the plan.
EBS is not an accounting or law firm and the foregoing is a general summary of the rules and limitations that may apply to you. It is not intended to apply to all persons and situations and you should contact your tax or legal professional for advice. Please contact a member of the Wealth Management Group to discuss your specific situation.
Data provided has been obtained by third party sources. This data, while believed to be reliable, has not been independently verified by EBS.