Last month, the IRS announced the cost of living adjustments applicable to the various retirement plan limitations for 2021. Unfortunately, the bulk of the retirement savings limits don’t increase from 2020 levels.
Many practice owners set up a 401k plan as their office retirement plan. Amounts contributed to these plans generally reduce your taxable earnings and always grow tax deferred. Like 2020, you can contribute up to $19,500 into a 401(k) plan through salary deferrals in 2021.
Anyone 50 or older by December 31, 2021 can contribute an extra $6,500 into their 401(k) plan through salary deferrals next year, for a total annual contribution of $26,000. That is the same as what was allowed for 2020. Please note that you don’t need to actually wait until your 50th birthday to be able to start making these catch-up contributions, so adjust your deferrals as of the first paycheck of that monumental year.
Many smaller practices chose to set up a SIMPLE/IRA instead. SIMPLE’s work just like 401(k) plans, which means it’s up to you and each staff member to fund the bulk of this retirement savings account through salary deferrals. For 2021, the maximum contribution into your SIMPLE as salary deferrals remains at $13,500. Anyone 50 or older by December 31st can add an additional $3,000 in 2021, for a total annual salary deferral of $16,500, unchanged from 2020. Your practice will generally make matching contributions into each participant’s account of up to 3% of gross salary.
And if you are self-employed without staff who have worked for you for more than three years, you can contribute up to 20% of your net self-employment income into a SEP IRA. The maximum contribution into your SEP IRA for 2021 increases by $1,000 from 2020 to $58,000. Solo 401k’s allow self-employed individuals without staff (besides your spouse ) who work for you for more than 1,000 hours per year to hit the $58k max on less income and also increases the max to $64.5k for people 50 and over.
Increase to IRAs
Don’t forget about IRA’s. Even if you’re covered under a retirement plan through your practice, you and your spouse can each contribute up to $6,000 into a traditional IRA or Roth IRA (subject to income limitations) next year, as long as your combined wages and net self-employment income exceeds the total amount contributed. Anyone 50 or older can contribute an extra $1,000, increasing the total allowable contribution to $7,000. And don’t forget to contribute to a Roth for your kids who work at your practice. You have until April 15, 2021 to contribute to your IRAs for 2020.
There is a bit of good news for people looking to contribute to a Roth IRA in 2021. The amount you can earn and still contribute to a Roth did increase by $1,000 for single individuals and $2,000 for joint filers as follows:
- Single Individuals – Phase-out begins $125,000 and ends at $140,000
- Married Couples – Phase-out begins $198,000 and ends at $208,000
If your income is too high for a Roth, don’t forget that there is no income limitation for people looking to convert their IRAs to a Roth IRA, providing high-income taxpayers with a great opportunity to get money into these tax-free investment accounts using a strategy known as the “back-door Roth”.
And finally, if you’re married and your spouse isn’t covered under either an employer sponsored or self-employed retirement plan during the year, the phase-out range for your spouse making a deductible IRA contribution has increased to $198,000 – $208,000 for 2020, which is identical to the Roth IRA phase-out limits.
Re-Set Your 2021 Retirement Savings Budget
Most people won’t be able to max out these tax-advantaged retirement options unless they get on a budget and put away a set amount of money each month. With 2020 winding down, now’s the time to start thinking about resetting your monthly retirement savings goals for 2021.