IRS Releases Retirement-Related COLAs; 401(k) and IRA Contribution Limits Unchanged

(Parker Tax Publishing November 2020)

The IRS released the annual cost-of-living adjustments (COLAs) affecting dollar limitations for pension plans and other retirement-related items for 2021. The 401(k) contribution limit and annual IRA contribution deduction both remain unchanged at $19,500, and $6,000, respectively. Notice 2020-79.

On October 26, the IRS issued the 2021 cost-of-living adjustments (COLAs) for pension plans and other retirement-related items. While several items saw a COLA increase, many did not.

401(k) and IRA Annual Contribution Limits Remain Unchanged

(1) The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government'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 also remains unchanged at $6,500.

(2) The limitation on contributions to SIMPLE retirement accounts remains unchanged at $13,500 for 2021.

(3) The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

Retirement-Related Items That Saw COLA Increases

The following is a summary of some of the COLA increases for retirement-related items.

(1) The income ranges for determining eligibility to make deductible contributions to traditional IRAs and to Roth IRAs, and to claim the Saver's Credit all increased for 2021.

(2) Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or his or her spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. If neither the taxpayer nor his or her spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply. These are the phase-out ranges for 2021: (1) for single taxpayers covered by a workplace retirement plan, the phase-out range is $66,000 to $76,000, up from $65,000 to $75,000; (2) for married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $105,000 to $125,000, up from $104,000 to $124,000; (3) for an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple's income is between $198,000 and $208,000, up from $196,000 and $206,000; (4) for a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

(3) The income phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for 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. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

(4) The income limit for the Saver's Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $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.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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