Every year brings new tax rules and updates, so it’s important to take a quick look at retirement tax changes for 2021. Find out about possible tax increases. Manage your tax liability by using your retirement accounts and other tax deductions.
Tax Changes for Standard Tax Deductions
The standard deductions increase slightly due to inflation adjustments, to $12,550 for single filers and $25,100 for married filing jointly. Thanks to the TCJA, you’re still limited to only $10,000 in state and local tax deductions.
While the tax rates remain the same as the previous year, the good news is that the income brackets have been adjusted slightly upward compared to 2020. The top rate of 37% applies to singles making over $523,600 and joint filers with incomes over $628,300.
Capital gains tax income brackets have also been revised upwards, with 0% tax liability for singles making up to $40,400 and MFJ up to $80,800. The top rate of 20% is levied on singles with an income of $445,850 and joint filers earning at least $501,600.
Similarly, their hasn’t been much tax change to the retirement account and contribution landscape for 2021. Unfortunately, there were no inflation adjustments in contribution amounts to your employer retirement plan compared to last year.
However, the income levels at which phasing out and eliminating deductible or Roth contributions to an IRA increased slightly for 2021. This increase is good news for anyone who may be interested in allocating funds to an IRA in addition to maximizing their employer plan.
Required Minimum Distributions Tax Changes (RMDs)
You don’t have to start taking RMDs from a qualified retirement account until the year you turn 72. As a reminder, you’ll have RMDs from your employer retirement plan, including Roth 401(k), but not from your Roth IRA.
You can still delay taking your first distribution until April 15 of the following year, but after that, you must take your RMDs by December 31 each year. If you delay your first year’s RMD, you’ll have two to satisfy the year you turn 73. For that reason, we usually don’t recommend it, but you may have a unique situation in which delaying your first RMD would benefit you tax-wise.
The government waived 2020 RMDs due to the coronavirus. Unless there’s a different announcement, the requirements are back in force for 2021, erasing those tax changes in 2020.
However, you can potentially avoid paying the income taxes on an IRA by using a Qualified Charitable Distribution. Withdrawals from your Traditional IRA up to $100,000 that are contributed to a qualified charity are tax-free. The funds must go directly to the organization without making a pit stop at your bank account along the way, and a QCD can’t be used on a 401(k) or employer plan.
IRA contributions and other tax changes
If your employer doesn’t offer a retirement plan, you can contribute up to $6,000 in either a Traditional or Roth IRA. There is an additional catch-up of $1,000 for those age 50 and older. While their may not be many tax changes, you can change your contributions if you are not maximizing those now.
If your employer does have a retirement plan, whether or not you choose to take part in it, your ability to make a deductible Traditional IRA contribution or Roth IRA contribution is capped at certain income limits.
Remember, however, that you can always kick in nondeductible Traditional IRA funds up to the contribution limits. You’ll need to keep good records of what is deductible and what is not for determining the tax status of withdrawals later.
- Deductible Traditional contributions
- Begin to phase out at incomes of $66,000 if filing single/$105,000 for married filing jointly (for the person covered by an employer plan).
- Not allowed at incomes over $76,000 single/$125,000 married filing jointly.
- Begin to phase out at $198,000 for married filing jointly for the person who is not covered by an employer but whose spouse is) and not allowed above earnings of $208,000.
- Roth IRA contributions
- The maximum contribution is permitted for singles whose income is less than $125,000 and those married filing jointly with income less than $198,000.
- Contributions decline as incomes rise and reach zero for singles making at least $140,000 and couples filing jointly above $208,000.
- Married filing separate
- Whether contributing to a Traditional IRA or a Roth, an income of over $10,000 prevents IRA contributions if employer plans cover you.
No tax changes on contributions to employer retirement plans (other than SEP/SIMPLE IRAs)
If you have a 401(k), 403(b), 457, or Thrift Savings Plan (TSP), your salary deferral contribution limit remains at $19,500. Workers over age 50 can also add a $6,500 catch-up for a total of $26,000.
However, some plans don’t limit you to just the salary deferral and employer match. The total annual 401(k) contribution limit is $58,000 for those under 50 and $64,500 over 50. Potentially, if your plan allows, you can then add after-tax money to your 401(k) plan on top of your match and salary deferral. If you’re unsure, ask HR or the third-party administrator (TPA) on the plan.
We explained in an earlier post how this works, but here’s a shorter version for illustrative purposes. Suppose you’re under age 50, so you set aside the maximum of $19,500. Your employer adds a $2,500 match, so you have contributed a total of $22,000. If the plan allows, potentially, you could add in another $36,000 after-tax, which would grow tax-deferred inside the 401(k).
After-tax contributions into your employer plan can later be rolled into a Roth IRA, in what’s known as a Backdoor or Mega Roth. Investors who, because of their income, cannot contribute to a Roth IRA may find this technique valuable. So while there are not many tax changes, you can open new accounts or structure your retirement accounts to maximize you tax savings.
Health Savings Accounts (HSAs)
While these aren’t technically retirement accounts, you can use HSAs to bolster your nest egg. Unlike flex savings accounts or FSAs, they roll over from year to year. If you don’t use them for medical expenses, you can save them later, and the money grows tax-deferred.
These limits apply to the total contribution; that is, employer + employee, not employee alone. There’s also a slight difference in the $1,000 catch-up provision compared to what you find on retirement plans because the additional allowance is for workers age 55 and older.
- Self only
- $3,600 contribution limit
- $1,400 minimum deductible
- $7,000 out-of-pocket maximum
- Family plan
- $7,200 contribution limit
- $2,800 minimum deductible
- $14,000 maximum out-of-pocket
Want to talk about how to maximize your tax savings and what accounts you should set up to reduce your tax liability? Feel free to give us a call at (619)255-9554 or send us an email to set up an appointment.
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