Bad News for Super Savers

Low inflation keeps thresholds on retirement savings plans in check.

Baby boomer researching retirement savings plans.
(Image credit: Getty Images)

Every year, the IRS adjusts the maximum amount taxpayers can contribute to tax-advantaged retirement savings plans to reflect increases in the cost of living. Unfortunately, inflation was so low in 2020 that the maximum you can contribute to tax-advantaged retirement savings accounts is unchanged for 2021. Here’s how that breaks down:

Employer-sponsored retirement savings plans. The most you can stash in 401(k)s, Roth 401(k)s and other employer plans in 2021 is $19,500. The catch-up contribution for people 50 and older is $6,500.

Traditional or Roth IRAs. The maximum you can contribute to an IRA (opens in new tab) in 2021 is $6,000. The catch-up contribution for savers 50 and older remains at $1,000.

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There is a glimmer of good news: The IRS increased the amount of money that workers covered by an employer-sponsored plan can earn in 2021 and still deduct contributions to an IRA. (There are no income cutoffs for individuals who aren’t covered by an employer-sponsored plan; they can deduct the maximum allowed.)

Single taxpayers who are covered by a 401(k) or other workplace retirement (opens in new tab) plan can deduct their full contribution to an IRA if their income is $66,000 or less; the deduction gradually phases out until income reaches $76,000. That’s up from $65,000 to $75,000 in 2020. For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $105,000 to $125,000, up from $104,000 to $124,000.

If one spouse is covered by an employer-provided plan and the other is not, the second spouse can deduct IRA contributions if the couple’s joint income is between $198,000 and $208,000, up from $196,000 and $206,000 in 2020.

The IRS also adjusted the amount of money you can earn and still contribute to a Roth IRA. Roth contributions aren’t deductible, but as long as you’ve owned your Roth for at least five years and are 59½ or older, withdrawals are tax-free. Singles with modified adjusted gross income (MAGI) of less than $125,000 (up from $124,000 in 2020) can make the maximum contribution to a Roth. The amount phases out at $140,000 (up from $139,000). Married couples who file jointly can make the maximum con­tribution if their MAGI is less than $198,000, phasing out at $208,000 (up from $196,000 to $206,000).

There’s no income limit on converting a traditional IRA to a Roth (see Your Guide to Roth Conversions (opens in new tab)).

Save more for health care costs

The maximum you can stash in a health savings account goes up in 2021—although not by much. In 2021, you can save $3,600 for individual coverage, up from $3,550 in 2020. For family coverage, you can save as much as $7,200, up from $7,100 in 2020. The maximum catch-up contribution for people 50 and older remains unchanged at $1,000 for both individual and family accounts.

HSAs provide a powerful way to save for out-of-pocket medical expenses. Contributions are pretax (or deductible if your HSA isn’t employer-sponsored), the funds grow tax-deferred in the account, and withdrawals are tax-free for qualified medical expenses. If you don’t use the money, you can roll it over for future years. An HSA is also a smart way to save for medical expenses in retirement.

To qualify for an HSA, you must be enrolled in a high-deductible health insurance plan; the requirements remain unchanged for 2021. Your plan must have a deductible of at least $1,400 for in­dividual coverage or $2,800 for family coverage.

Your plan must also have a limit on out-of-pocket coverage in order to qualify for an HSA, and those thresholds increase slightly in 2021. Individual policies must have a limit of $7,000 for individual coverage, up from $6,900 in 2020. For family plans, the maximum is $14,000, up from $13,800 in 2020.

Thanks to the Coronavirus Aid, Relief and Economic Security (CARES) Act signed into law in early 2020, more medical expenses are eligible for tax-free withdrawals. You can use money from your HSA to pay for over-the-counter medications, such as aspirin and cough syrup, without a doctor’s prescription. You can also use the money to pay for tampons, sanitary pads and other feminine hygiene products.

Sandra Block
Senior Editor, Kiplinger's Personal Finance

Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.