One would think after a few years of writing a weekly blog, I’d have learned a thing or two. For instance, if you want to get someone to read your blog, you probably shouldn’t title it something like “2021 IRS Limits Announced.” It’s likely the least exciting headline of all time, and being in the midst of a historic election season likely doesn’t help, either.
In any event, the people need to know and I promise to deliver, even if it’s less than exciting news. This is why I’ll make it game show style (I can hear all the ‘oohs & ahhs’ now). I also promise to make it up with a super thought-provoking blog next time.
Alright to the topic at hand. Every year, the IRS puts out its annual index limits for things like retirement plans and Social Security. Although not thrilling, it’s quite important to stay on top of these things, so one can plan accordingly.
If you’re all sitting down and on the edge of your seats, I’ll begin…
What has changed and what has not?
401(k), 403(b), 457 plans – The most common employer sponsored retirement plans in 2020 had an annual employee contribution limit of $19,500. Can you guess what they are doing in 2021? If you guessed a change, then you picked the curtain with the goat! There’s no change scheduled for the upcoming year, instead you’ll have the same $19,500 limit. I guess the bright side is if you’re already maxing out, no adjustments are really needed. If you aren’t, challenge yourself to see if you can increase to the max (or at very least increase a percent or two).
Over 50 catch-up contributions – This is good information if you’re not aware. For those who are currently 50 (or who’ll turn 50 any time between now and the end of 2021), you can contribute an additional amount into your work retirement plans (as referenced above). This is a great way to stash more money away on a tax deferred basis. In 2020, that catch-up provision was $6,500 for a total of $26,000 able to be contributed if 50 or older. Sticking with the guessing game what do you think they’re doing for 2021? X gets the square if you guessed no change. For 2021, there’s also no change to the catch-up provision.
Defined contribution limit – In other words, that’s the total amount of money (including employer match, pre-tax, and after-tax) which can go into an employer sponsored retirement plan such as a 401(k). In 2020, that aggregate total maximum was $57,000. Aaaaaand what will they do for the upcoming year? (No Whammy, No Whammy, No Whammy… Stop!)
If you again said “no change,” you’d be absolutely wrong and have earned that whammy. Next year, there’s a slight change here, as they’ll be increasing the total aggregate amount to a whopping $58,000. This may not seem like much, but those doing my favorite financial planning strategy (the Mega Backdoor Roth) can take advantage of this change.
Roth & Traditional IRA limits – For those without retirement plans, the IRA has always been a great retirement savings tool. In 2020, one can contribute $6,000, and if 50 or over, an additional $1,000. Now, for $1,000, the answer is No Change. Can you guess the question? That’s right, “What will happen to these limits in 2021?” There will be no adjustments here as well.
Social Security taxable wage base – Each year, the IRS considers the amount of wages on which they’ll tax an individual on for Social Security, and if they’ll increase it. In 2020, that figure was $137,700. Thus, you paid SS tax on all your income up to that limit and none after. This is why a lot of you get “raises” in your pay check at some point during the year. So, what would you like to bid as the 2021 Social Security taxable wage base? The closest without going over wins. I hear $139,000 from Steve, $145,300 from Sally, $141,300 from June, and what’s that? 1 from Larry?! The actual, retail price of the Social Security increase for next year is…. $142,800. Our winner is June! Come on down; you win the lovely ability to pay more taxes next year to Social Security. (That prize is even worse than the goat). It’s funny, not much else is changing on ability to save, but ability to tax? Well no surprise there, especially with the state of Social Security these days.
Social Security COLA increase – Also Each year, Social Security announces their annual increase, or lack thereof. For 2021, we polled 100 IRS agents and came up with the top answer for what will happen to your Social Security payments if you’re already collecting. What’s your guess? Survey says… 1.3% cost of living adjustment for 2021. There’ll be a slight adjustment to your benefit for next year, so at least there’s something to celebrate.
Let’s Make a Deal
There are plenty of other adjustments being made, but I figured I’d stick with the most popular ones or the ones clients would be most concerned with (plus, I’m out of clever game show quips).
If you’ve enjoyed this blog, or any others, certainly share with people you think would enjoy them as well. Deal?
Deal! As always, we are here for anything, and everything you need. Stay wealthy, healthy, and happy.