Financial Planning

Bad News for Super Savers

Low inflation keeps thresholds on retirement savings plans in check.

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 in 2021 is $6,000. The catch-up contribution for savers 50 and older remains at $1,000.

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 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).

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.

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