401(k) and IRA limits: Here’s the good (and bad) news for savers in 2021

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Workers looking to take advantage of a Roth IRA may have an easier path in 2021. That’s because the IRS has increased the income ranges on IRAs, allowing you to earn more money and still take advantage of the tax-free Roth account or the tax-deferred traditional IRA.

But those looking to save more in either account – or an employer-sponsored retirement account – are going to be disappointed by the new IRS rules.

Higher income limits for IRAs

The good news for savers is that the income limits are climbing for IRAs. For 2021, the limits on modified adjusted gross income (MAGI) to be eligible for a Roth IRA can be seen in the table below.

Filing Status Maximum income for full contribution Phases out at
Individual, head of household $125,0000 $140,000
Married filing jointly $198,000 $208,000

In 2020, the Roth IRA limits are $124,000 to $139,000 for individuals and heads of household, and $196,000 to $206,000 for married filing jointly.

However, if you still want to take advantage of the account, you may be able to use a backdoor Roth IRA, but you’ll want to be careful about the tax consequences.

For traditional IRAs, the limits on MAGI for deducting contributions to an IRA have also increased in 2021. Note that these limits apply only if you and your spouse are covered by a workplace retirement plan.

Filing Status Maximum income for fully deductible contribution Deductibility phases out at
Individual, head of household $66,000 $76,000
Married filing jointly $105,000 $125,000

If you and your spouse are not covered by an employer plan, your contributions are fully deductible regardless of your income.

Income limits are only one difference between the traditional IRA and the Roth IRA. Here are other key differences and which account is better for investors.

Bad news for IRA, 401(k) contribution limits

Workers looking to take maximum advantage of their retirement accounts may be disappointed by the recent news, however. The tax agency is maintaining the same annual contribution limits on IRAs and employer-sponsored accounts such as the 401(k), 403(b) and most 457 plans.

“The low inflation environment means annual contribution limits to tax-advantaged retirement savings accounts will remain the same in 2021,” says Greg McBride, CFA, Bankrate chief financial analyst.

That means for 2021 workers will be able to contribute up to $6,000 in an IRA. Those over age 50 are still allowed to make a $1,000 catch-up contribution.

Maximum contributions to employer-sponsored plans will remain at $19,500 for 2021, including popular 401(k) and 403(b) plans. Those over age 50 can still make catch-up contributions of $6,500.

“IRA contribution limits will be the same for the third consecutive year and workplace retirement plan contribution limits will spend a second year at the present levels,” says McBride.

The contribution limit on a SIMPLE IRA, another workplace plan, remains at $13,500.

Bottom line

While contributions limits aren’t going up in 2021, you can still make the most of what’s available to you. That means maxing out your employer-sponsored accounts and your IRA. Those looking to optimize their situation should also look at the tax advantages of a health savings account.

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