Traditional IRA Income Limits for 2021 | ||
---|---|---|
If your filing status is… | And your modified AGI is… | Then you can take… |
Single, head of household, qualifying widow(er), married filing jointly or separately and neither spouse is covered by a plan at work | Any amount | A full deduction up to the amount of your contribution limit |
Married filing jointly or qualifying widow(er) and you’re covered by a plan at work | $105,000 or less | A full deduction up to the amount of your contribution limit |
More than $105,000 but less than $125,000 | A partial deduction | |
$125,000 or more | No deduction | |
Married filing jointly and your spouse is covered by a plan at work | $198,000 or less | A full deduction up to the amount of your contribution limit |
More than $198,000 but less than $208,000 | A partial deduction | |
$208,000 or more | No deduction | |
Single or head of household and you’re covered by a plan at work | $66,000 or less | A full deduction up to the amount of your contribution limit |
More than $66,000 but less than $76,000 | A partial deduction | |
$76,000 or more | No deduction | |
Married filing separately and either spouse is covered by a plan at work | Less than $10,000 | A partial deduction |
$10,000 or more | No deduction |
More Details on IRA Contributions
With Roth and traditional IRA contributions, limits are imposed per taxpayer, not per account. That means an individual may not contribute $6,000 to a Roth IRA and an additional $6,000 to a traditional IRA in 2021. Instead, one may contribute a total of $6,000 split across the different IRAs, say $4,000 to a Roth IRA, and the remaining $2,000 to a traditional IRA.
Spousal IRAs are regular IRAs that married couples who file jointly may participate in.
Married couples can also contribute the same amounts to a spousal IRA for a non-working spouse, as long as one spouse earns enough income to cover both contributions.
401(k) Contribution Limits
As with traditional IRAs, the eligibility to contribute to 401(k)s is not governed by income limits. Furthermore, investors may annually stash significantly more money in their 401(k)s. Case in point, for 2021, the 401(k) contribution limit is $19,500 for those under 50, and $26,000 for those older (rising to $20,500 and $27,000, respectively, in 2022).
While 401(k) contributions reduce your taxes, you don’t actually claim a deduction when you file because those contributions come directly out of your paycheck, and are therefore made with pre-tax dollars. This lowers your taxable income for the year, saving you cash at tax time.
401(k) Match Limits
The biggest benefit of a 401(k) plan is the employer match, which is typically a percentage of your contribution, up to a certain amount of your salary. For example, your employer may match 50% of your contributions, up to 5% of your salary. So, if you earn $100,000 and contribute $10,000 to your 401(k), your employer would kick in an extra $2,500 = ($100,000 x 5% = $5,000 x 50%).
If your employer offers a match, be sure to contribute enough to take advantage of the full amount.
Although any match your employer provides doesn’t count toward your annual contribution limit, the IRS does limit the total dollars annually invested into your 401(k). For 2021, the combined 401(k) contribution limits between yourself and the employer-matched funds are as follows:
- $58,000 if you’re under 50 (rising to $61,000 in 2022)
- $64,500 if you’re 50 or older (rising to $67,500 in 2022)
- 100% of your salary if it’s less than the dollar limits
Ineligible (Excess) IRA Contributions
Those who invest more dollars into an IRA than they’re entitled to will be penalized with a 6% excise tax on any excess contribution. This fine will be levied each year until the mistake is corrected. Most people who make ineligible IRA contributions do so inadvertently, often under the following scenarios:
- They earn more money and fall outside the income eligibility range.
- They forget that they contributed earlier that year.
- They contributed money that doesn’t qualify as earned income.
- They contributed more than their earned income for the year.
How to Fix Excess IRA Contributions
If you realize you’ve contributed too much money to a single IRA account, or a combination of accounts, there are several ways to reverse the excess contributions. But it’s important to act fast because failure to meet deadlines can trigger stiff penalties.
Those who contribute too much to an IRA will annually face a 6% penalty until they correct the mistake.
If you discover your mistake after filing income taxes for the year, you can remove the excess contribution within six months. Alternatively, you can reduce the following year’s contribution by the excess amount. For example, if you errantly contributed $8,000 one year, you can reduce your contribution by $2,000 (the excess amount) the following year. But remember that carrying forward the excess this way subjects you to that 6% penalty until the excess is absorbed.
Excess 401(k) Contributions
Even though your employer deducts your contributions to a 401(k), it’s still possible to over-invest if the following scenarios occur:
- You switch employers or retirement plans in the same year and contribute too much to each plan.
- You hold two jobs and two plans and fail to realize that the limit is per taxpayer, not per account.
- You receive a raise or a bonus, and neglect to change your contribution percentage accordingly.
How to Fix Excess Deferrals
If you over-contribute to your 401(k), immediately let your plan administrator know you made an excess deferral—hopefully before March 1 of the year following the one in which you over-contributed. The excess amount and any related earnings should be returned to you by April 15. If the excess amount isn’t returned to you by that date, you may end up paying taxes on the amount twice: once in the year you contributed too much and once when the excess amount is returned to you.
The Bottom Line
There are annual limits to contributions investors may make into their 401(k) plans and IRAs. If you cannot invest the full amount possible, it is strategically shrewd to max out your investments into your 401(k) to earn the full employer match. Any remaining funds should be channeled to your IRA.