2021 Contribution Limits: IRAs and Beyond

Self-Directed IRAs (SDIRAs) are some of the best vehicles when it comes to receiving tax benefits when we use them to invest. Common ways to fund an IRA are by using methods such as rollovers from previous employers or transfers from other IRA accounts, but personal contributions may also be another way to help these accounts grow. 

Although it would be nice to contribute as much as we wanted, every year specific limitations are set by the IRS on how much money individuals can contribute to their IRAs and other tax advantaged retirement accounts. Now that the 2021 contribution limits have been announced, we’ve listed those limits here for you.  

Personal Plans

Traditional and Roth IRAs are both considered personal plans, and often follow similar guidelines on their limits. For 2021, the contribution limits for Traditional and Roth IRAs remained the same as 2020, but some other accounts did see an increase. 

The 2021 contribution limit for Traditional and Roth IRAs is $6,000, with a catch –up contribution of $1,000 ($7,000 total) if you’re age 50 or older. In order to make a contribution to these two accounts, one must have “earned income”. Earned income includes money such as wages, salaries, bonuses, commissions and self-employment income. Disability retirement benefits can also be considered earned income in some cases. 

Anyone can contribute to a Traditional IRA if they have earned income, but in some cases, you may not be able to directly contribute to a Roth IRA if you make too much money. Certain limitations have been placed on Roth IRAs that state if your income exceeds a specific amount, you are ineligible to directly contribute. 

2021 Traditional IRA Deduction Limits
2021 Roth IRA Income Limits

If you find that you do make too much money in 2021 to contribute to a Roth IRA directly, there’s always another option. A “Back Door Roth Conversion” could allow you to fund a Traditional IRA by making a non-deductible contribution and then convert it to a Roth account afterward, allowing you the benefits of a Roth IRA. If you have questions on Roth Conversions, don’t hesitate to contact one of our Certified IRA Specialists.

Remember. You are never required to contribute the maximum amount allowed, but in order to contribute up to the contribution limit, you must have enough earned income to cover the contribution you make. 

Employer Plans

Traditional and Roth IRAs are not the only plans with contribution limits. Self-employment plans are also subject to potential income changes. Retirement accounts such as the SEP IRA, SIMPLE IRA, and Solo 401(k) contribution limits were also reviewed for 2021. 

For SEP IRAs, the IRS increased the limit from $57,000 in 2020 to $58,000 for 2021. Like the SEP IRA, Solo 401(k)s followed the same pattern. The Solo 401(k) salary deferral amount stayed the same at $19,500 but the defined contribution maximum limit increased from $57,000 to $58,000, with an additional $6,500 catch-up contribution ($64,500 total) for those 50 or older. 

The Savings Incentive Match Plan for Employees, also known as the SIMPLE IRA, is the final employer plan offered at Quest. This account, often used by small businesses, did not see a change for 2021. The contribution limits for SIMPLE IRAs remained the same for 2021, which means employees under 50 can contribute up to $13,500, while those 50 and over get a $3,000 catch-up ($16,500 total). 

SIMPLE plans typically require the employer to match each employee’s salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee’s compensation, also. For more information about employer matching contributions and any 2021 changes, visit the IRS website on SIMPLE IRAs. 

Special Plans

Health Savings Accounts (HSAs) and Coverdell Education Savings Accounts (ESAs) are the two final tax-advantaged accounts that Quest offers, both which follow the IRS contribution rules and guidelines. For these accounts, when you take the funds out for qualified medical or educational expenses, the distributions are tax-free! So, how much can you put contribute to them in 2021?

The annual limit on HSA contributions for 2021 saw a minimal increase. It will be $3,600 for self-only and $7,200 for family coverage, which comes out to be right around a 1.5% increase from limit in 2020. For those over the age of 55 or older, there is an additional $1,000 that can be contributed to the account. 

Minimum deductibles for HSAs saw no change for 2021, yet maximum out-of-pocket amounts did increase by $100 for individuals with self-coverage. It increased by $200 for those who have family coverage.

Lastly, the Coverdell ESA has a contribution limit of $2,000 per year per child. This means, each child in one household could each receive a $2,000 contribution to their ESA per year. There was no change from 2020 to 2021. 

Key Takeaways

Although each plan works a little bit different, the existence of a contribution limit remains a similarity. Understanding contribution limits will not only allow you to maximize your retirement account each year, it will also help you grow you future wealth faster! For more contribution questions, check out the helpful chart below or call an IRA Specialist at 855-FUN-IRAs (386.4727) and start preparing for your 2021 contributions!  

2021 IRA Contribution Limits

Getting the Most Out of Your Annual Self-Directed IRA Contributions

Self-Directed IRA ContributionsContributing to your self-directed IRA every year is vital for your financial future. But not everyone does all they can to extract the most value out of their annual retirement contributions. With that in mind, here are some tips for doing so.

Invest Early. You can get the most out of your annual contributions by depositing them into your self-directed IRA as early in the tax year as possible. Ideally, you should deposit the full annual limit ($6,000 for most taxpayers, and $7,000 for individuals age 50 or over) on January 1 of each year.

Consider two individuals, one of whom makes a $5,000 annual contribution to their IRA every year in January 1, and another who waits until December 31 to make the same contribution. Assuming a modest 6% return, after 20 years the first taxpayer will have over $10,000 more in their account than the second, even though they deposited the same amounts during the same tax years. Simply by virtue of giving their money a little extra time to grow, the first taxpayer has a noticeably larger nest egg. When the rates of return are higher, and the timeframe longer, the difference is even more pronounced.

Diversify and Balance Across Your Other Accounts. Another way to get the most out of your self-directed IRA and the contributions you make each year is to use your account to diversify and balance your investments across all of your accounts.

Think of it this way: there’s a good chance that your overall investment portfolio (taking into account not only your retirement accounts but also your taxable investment accounts) include a range of asset types –income-generating assets as well as non-income generating assets that are more focused on capital gains. By prioritizing more of the income generating assets in your self-directed IRA (where such income will either be tax-deferred or tax-free), you may be able to save significant amounts on your tax bill.

Target Your Retirement Timeframe. You can also maximize the value of the annual contributions you make to your self-directed IRA by taking advantage of the freedoms you have with this account. Self-directed IRAs allow you to invest in highly illiquid assets such as real estate and private equity, which are ideal for some longer-term investors.

The True Value of a Tax Deduction. Remember that many other factors can impact your tax burden. One way to see exactly how much a contribution to a traditional self-directed IRA versus a raw self-directed IRA can save you on this year’s taxes is to prepare two different draft versions of your tax return and compare the numbers. If a $6,000 contribution to a traditional self-directed IRA only nets you a couple hundred dollars savings on your tax return, then you may wish to make a contribution to a Roth account instead. Some taxpayers maintain one of each account type, and then make their contribution to whichever account maximizes their utility in any given year.

The bottom line is to contribute to your self-directed IRA every single year, to the greatest extent possible. You can’t go back and catch up later if you miss the opportunity to make the maximum contribution in a particular year.