The IRS releases new requirements every year related to IRA (individual retirement account) investments, including maximum contributions investors can make in these retirement accounts and more.
Failing to understand and work within these new limits could prove costly on the other side of your retirement investing (either before or after retirement).
The information below will help you understand changes ahead for 2021 and how they differ from the limits established in 2020.
IRAs are designed to act as additional retirement savings, supplementing Social Security Benefits, and other retirement savings such as an employer-sponsored 401(k). They can be useful in helping you create a diversified portfolio and are instrumental in funding a more comfortable retirement.
Rules change frequently for IRA contributions, however, and it is important for investors to understand and adhere to these changes, especially as they relate to the following:
- Contribution limits
- Income limits
- Deduction eligibility and limits
Understanding these limits can help you avoid mistakes that may result in substantial penalties and fines.
Roth IRA Limits for 2021 Highlights
- Married couples filing jointly can contribute up to the full limit in a Roth IRA with Modified Adjusted Gross income of less than $198,000 in 2021 (up from $196,00 in 2020). However, those with incomes between $198,000 and $208,000 can only contribute a reduced amount. Those who have incomes of $208,000 or more cannot contribute at all.
- Married couples filing separately experience reduced contribution limits with incomes less than $10,000. They may not contribute at all if their income is equal to or greater than $10,000. This value remains unchanged from 2020.
- Single individuals with incomes less than $125,000 can contribute up to the maximum limit to their Roth IRAs. This represents an increase of $1,000 over 2020. However, those with incomes between $125,000 and $139,999 may contribute a reduced amount. Those with incomes greater than $140,000 may not contribute.
Couples filing separately who did not live with their spouses during the year should follow the instructions for single individuals when filing to determine deductions.
Get more information about Roth IRA contributions and requirements by visiting the IRS website.
Traditional IRA Limits for 2021 Highlights
- Phase-out limits for single individuals with workplace retirement plans increased by $1,000 over 2020 limits; increasing from between $65,000 and $75,000 to between $66,000 and $76,000 for 2021.
- Phase-out limits for married couples filing jointly with workplace plans also increased by $1,000 for the year; increasing from $104,000 to $124,000 in 2020 to $105,000 to $125,000 in 2021.
- Married couples filing jointly in which one spouse is covered by a workplace retirement plan and the other is not will phase out if their combined income is between $198,000 and $208,000 in 2021, which is a $2,000 increase over 2020 when the range was $196,000 to $206,000.
- Married individuals who file separately, when covered by workplace retirement plans, have a phase-out range between $0 and $10,000. It is not subject to annual cost-of-living adjustments.
- If you are single or if neither you nor your spouse is covered by employer-sponsored retirement plans, you may claim the full deduction on your federal income tax return.
Get more information about Traditional IRA deduction limits by visiting the IRS website today.
Types of IRAs
There are seven different types of IRAs for investors to choose from. Each has its own set of guidelines to follow. Explore them all before investing to decide which one offers you the best potential ROI.
- Traditional IRAs
- Roth IRAs
- SEP IRAs
- Nondeductible IRAs
- Spousal IRAs
- Simple IRAs
- Self-directed IRAs
Traditional and Roth IRAs are by far the most common of these IRAs. However, the others present some attractive alternatives to some who are planning for retirement.
The more you know about the contribution and income limits, the better prepared you are to make sound investment decisions. There are no guarantees when it comes to investing. However, avoiding unnecessary penalties, fines, and fees is always a more desirable outcome.