While most of us start preparing our income taxes at the beginning of the year, there are moves you can take now to help relieve your tax burden. When it comes to retirement planning, there are strategies that can maximize your savings benefits, too. The following explains 2021 contribution limits and deadlines for opening and funding retirement plans so you can use these moves to your advantage.
It’s important to know the 2021 contribution limits and deadlines to fund your retirement plan. Depending on the type of account you have, contributions can reduce your taxable income. If you can contribute the maximum to your plan as the IRS allows, you’ll increase your ability to grow retirement savings, as well.
If you don’t have a retirement account yet, don’t worry. You still have time to open and fund a few different retirement plans to save for your future and limit your tax liability.
2021 Contribution Limits and Deadlines
Every year, the IRS sets a dollar amount that you can contribute to your retirement plan. Sometimes the amount increases, sometimes it doesn’t. If you already have an account, hopefully, you’re saving a bit from every paycheck to deposit into it throughout the year. But there are several retirement plans that the IRS allows you to open and fund to up to the day you file your taxes to count toward this tax year. Your financial advisor or CPA can explain (where applicable) how much of your contribution is tax deductible.
Whether you are employed by a company that offers retirement benefits or self-employed with an individual plan, here’s what you need to know so you can maximize the earning potential of your account. The more you’re able to save and contribute each year increases the capital your plan has to reinvest to earn the income you need to retire in comfort.
Traditional and Roth IRAs
- These IRAs must be opened and funded by April 15 of the following year in order to count on current year’s tax return. (I.e., by April 15, 2022 to count for the 2021 tax year.)
- The annual maximum deposit for both plans in 2021 is $6,000 (or $7,000 if you’re 50 years of age or older, thanks to the catch-up provision).
- If you have a traditional IRA, you have the potential to make tax-deductible contributions to that plan.
- Roth IRAs don’t allow for tax-deductible contributions, but the income in these plans grows tax free.
The deadline to open a SIMPLE IRA is October 1 in the current year. You’ve missed that date for 2021. However, if you already have one, you still have time to make contributions to your plan.
- Employee compensation deferrals can be made no later than December 31.
- Employer contributions must be made by the date of filing your return. If you filed an extension, the employer portion can be extended, as well, but must be made before the date the return is filed.
- Employees can contribute up to $13,500 for this year (or $16,500 if you’re 50 or older).
- The employer portion is limited to 1-3 percent of an employee’s annual compensation.
- All employee contributions made by the business are tax deductible on your business’s tax return.
You can open and/or contribute to a SEP IRA before you file your tax return.
- If you file an extension, you gain even more time to open and fund the account, provided that this occurs before the due date of your tax return. For example, for a 2021 SEP IRA contribution, you have until October 15, 2022 (which is the deadline for all extensions) to open and contribute to your SEP account.
- 2021 contributions cannot exceed 25 percent of your compensation or $58,000 (whichever amount is less).
- Contributions to SEP IRAs made by your business to employees are tax deductible for your business tax return, up to the amount of the employer contribution or 25 percent of compensation—whichever is the lesser of the two. Consult with a tax professional, as this can be somewhat complex to determine.
Individual 401(k) Plans
- Individual or solo 401(k) plans must be established by your tax-filing deadline plus any extensions.
- All contributions (both employee salary deferral and employer profit-sharing matches) must be made by the date you file your return, which includes any extensions.
- The annual contribution limit for salary deferrals is $19,500 (or $26,000 if you’re 50 or older).
- If your plan involves a profit-sharing match, you as the employer, can contribute up to 25 percent of your compensation or 25 percent of your income if you’re self-employed.
- Your total salary deferral plus profit sharing match caps out at $58,000, or $64,500 if you’ve reached the age of 50 or older.
- Contributions to your solo 401(k) can be made as tax-deferred or post-tax (Roth contributions).
HSAs and ESAs
Health savings accounts have an individual annual contribution limit of $3,600 ($7,200 for families) with a $1,000 catch-up contribution allowed if you’re over 55. Education savings accounts allow $2,000 maximum contributions per year, per beneficiary. You can make contributions to these accounts through April 15, 2022, to count for 2021.
Your Takeaway on 2021 Contributions and Deadlines
Understanding the IRS contribution rules of your retirement plan is just as important as choosing the right plan. The information provided above is a guideline, but you should always consult your tax or financial advisor to ensure your transactions are in compliance with IRS rules and regulations.
If you have questions about this article or wish to learn more about self-directed IRAs, please contact Advanta IRA. We are happy to answer questions you may have pertaining to self-directed accounts and the rules that govern them.
This article was published on November 10, 2018 but has been updated with current information regarding 2021 contribution limits and other deadlines.