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What are the 2021 Contribution Limits for IRAs, 401(k)s and HSAs?

Financial adviser Dana Anspach of Sensible Money describes the contribution limits those saving for retirement need to know for 2021.

How much can you contribute to your traditional and Roth IRAs in 2021?

The annual contribution limit for 2021 is $6,000, or $7,000 if you’re age 50 or older, Dana Anspach, CFP, RMA, president of Sensible Money said in an interview.

Read Retirement Topics - Catch-Up Contributions.

Note: For 2021, the total contributions you make to all of your traditional IRAs and Roth IRAs can't be more than $6,000 ($7,000 if you're age 50 or older), or if less, your taxable compensation for the year. Read Retirement Topics - IRA Contribution Limits.

Note too that the IRA contribution limit does not apply to rollover contributions, and your traditional IRA contributions may be tax-deductible. The deduction, according to the IRS, may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels. Read IRA deduction limits.

Also worth noting is that your Roth IRA contribution may be limited based on your filing status and income. Read 2021 - Amount of Roth IRA Contributions You Can Make for 2021. Also, read IRA deduction limits.

2021 Retirement Plan Contribution and AGI Limits

2021 Retirement Plan Contribution Limits

Deferral limits for 401(k) plans

As for those saving for retirement in a 401(k) plan, the annual contribution limit for 2021 is $19,500 in 2021 and those age 50 and over at the end of the calendar year can contribute an additional $6,500. Read Retirement Topics - Catch-Up Contributions

Best case, those who have put their savings on autopilot should make sure they are "maxing out" how much they are contributing to their various retirement accounts earlier rather than later in the year, said Anspach.

Front-loading your retirement accounts - if you have the cash - is worth doing to take advantage of the potential compounding. But if that's not possible make sure, at a minimum, your contributions to your retirement accounts are on autopilot, Anspach said.

Health Savings Accounts

The annual limit on HSA contributions for 2021 is $3,600 for self-only and $7,200 for family coverage. And the catch-up contribution for those ages 55 and over is $1,000. Read Revenue Procedure 2020-32.

According to Anspach, HSAs along with Roth IRAs are the "superheroes" of retirement accounts. Why so? HSAs, which have often been described as an IRA for health care expenses in retirement, are triple tax tax-advantaged accounts. Contributions, qualified withdrawals, and investment growth are all tax-free.

For her part, Anspach says those who have both a 401(k) and HSA at work should consider funding their HSA to the annual limit first before contributing to their 410(k).

"Make sure you're putting the maximum amount in the HSA first," she said. "And then let's put the additional into the 401(k) because the HSA has such powerful tax benefits."

Of note, Anspach said you don't have to have earned income to make a contribution to an HSA, as you do with most retirement accounts.

Missed opportunities

Anspach also said those saving for retirement sometimes miss opportunities to set aside even more than they are.

For instance, some companies, such as Dell, offer you the opportunity to contribute to an after-tax account even after you've maxed out your 401(k), according to Amy Shepard, a financial planner with Sensible Money.

For example, Dell's plan allows a total contribution amount between 0-50% of compensation when combining all pretax, Roth and after-tax contributions (up to IRS limits). The maximum that can be contributed to the after-tax account is $32,000 for 2021, though some employers may have a percentage cap.

"This is a huge benefit for employees because it allows them to max out their 401(k) and also save additional after-tax dollars easily through payroll deductions," Shepard said. "An added benefit with Dell's plan is they allow in-plan Roth conversions which makes it easy to convert those after-tax dollars to Roth so that both contributions and earnings can be withdrawn tax-free in retirement."

"For one of our clients, who is in the 35% marginal tax bracket, we were able to use the features of her Dell 401(k) to add value and simplicity to her retirement plan," said Shepard. "Prior to meeting with us, she had been maxing out her pretax 401(k) ($19,500 + $6,500 catch-up) and saving additional money in a traditional brokerage account."

"We recommended that she max out her 401(k) for the tax deduction and save additional money in the after-tax account and do annual in-plan Roth conversions," said Shepard.

With her initial approach, Shepard said the growth in the client's brokerage account would have been taxed at capital gains rates (likely 15% tax on most earnings). "By shifting to the recommended approach and doing the in-plan Roth conversions each year, the growth on that money will be tax-free. Additionally, she could set this all up through payroll deductions which made it easy to save consistently."

This tactic, sometimes called the "mega backdoor" Roth IRA, is a way to super fund your Roth IRA, said Shepard. "And even if your income is too high to contribute to a regular Roth IRA, this allows you to get money into a Roth type of account where the money grows tax-free and assuming you follow the rules, it comes out tax-free in retirement," she said.

Anspach also noted that individuals sometimes fail to take advantage of contributing to a nondeductible IRA or Spousal IRA.

According to the IRS, if you file a joint return, you may be able to contribute to an IRA even if you didn’t have taxable compensation as long as your spouse did. Each spouse can contribute up to the current limit; however, the total of your combined contributions can’t be more than the taxable compensation reported on your joint return.

Creditor Protection

Since one never knows what's going to happen in life, Anspach believes it's a good idea to save as much as possible in retirement accounts which, unlike taxable accounts, have creditor protection at the federal level and, to varying degrees, at state levels.

"I think of (bankruptcy and lawsuits) as an asymmetric risk," she said.

And if those things should happen, the bucket of money in your retirement accounts is protected, she said. "It can continue to grow for your retirement. It could be that nest egg you can fall back on if something truly unforeseen happens. And that's why I think it's so important that you maximum fund those types of accounts each and every year."

Use it or lose it

The last point worth noting is that there are deadlines to fund your retirement accounts. "Once the year is over you can't go back and make a contribution for past years," said Anspach. "So, you use it or lose it. You fill up that bucket for that year, and you don't get the opportunity to go back. So as part of your savings plan, make an effort to maximum fund everything you're eligible to do each and every year."

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