New Years is a time to celebrate new beginnings. Out with the old and in with the new. This should also include your finances. While 2020 was a challenging year for navigating all the changes happening in the financial world, here are some important changes to note as you start your financial journey into 2021.
Plan your Retirement Savings Contributions
Retirement savings contribution limits remain the same as 2020, as 401ks are still limited to $19,500 with a catch-up contribution of $6,500 for those 50 and older. Traditional IRA and Roth IRA limits are also unchanged from 2020, with a maximum of $6,000 and a catch-up contribution of $1,000 for 50+. However, one thing did change in 2021, the income ranges for these tax breaks.
The 2021 phase outs1 for a Traditional IRA are as follows:
- $66,000 – $76,000 for a single person with a workplace retirement plan
- $105,000 – $125,000 for a married couple filing jointly if the spouse making the IRA contribution has a workplace retirement plan
- $198,000 – $208,000 for a married couple if the spouse contributing to an IRA is not covered by a workplace retirement plan and the other spouse is covered
- $0 – $10,000 for a married person filing a separate return who is covered by a workplace retirement plan
Roth IRA contributions are made on an after-tax basis and the actual amount that you can contribute is based on your income for the year. If you are single with a modified adjusted gross income (MAGI) less than $125,000, or are married with less than $198,000, you can contribute the maximum ($6,000). Contribution limits start to decrease above those MAGI amounts and disappear altogether once your income reaches $140,000 if single or $208,000 if married filing jointly.
RMDs Will Begin Again in 2021
In 2019, The SECURE Act passed a law to increase the RMD beginning age for IRA owners from 70 ½ to 72. Then the Coronavirus Relief (CARES Act) and Economic Stimulus plans waived the RMD requirements for 2020. The most recent COVID bills did not extend the waiver, therefore RMDs are on track to resume for 2021. Do you have to take an RMD from your Individual IRA this year2?
- YES – If you were 70 ½ or older on December 31, 2019
- YES – If you were born at any time in 1949 or earlier, as this means that you would be at least age 72 on December 31, 2021.
- NO – If you were born 1950 and after, you would not have reached age 70 ½ by December 31, 2019 and you would be under age 72 as of December 31, 2021.
RMDs are calculated based on the account value as of December 31, 2020, which means for most people, the RMD amount will be higher than 2019. RMDs must be taken by December 31, 2021; however, legislation is rapidly changing and there could be a chance that the waiver is extended through 2021. If this were to happen, and you have already made your 2021 RMD, pay special attention to the deadlines (the initial 60 day-rollover period was extended through August 31, 2021). If you are within the deadline, you can transfer the RMD funds back to your IRA, less the taxes that were withheld. Those taxes will get deducted from your return the following year. It is important to work with your Advisor or Tax Professional to ensure your transactions get properly reported to the IRS.
Adjust your Health Savings and Flexible Spending Accounts for 2021
The annual limit for contributing to your Health Savings Account (HSA) has increased for 2021. Self-only plans can contribute up to $3,600 and family plans can contribute up to $7,200. HSAs also allow for $1,000 catch-up contributions for those age 55 as of December 31, 2021 and older. If your employer makes contributions to your HSA on your behalf, be sure and adjust your contribution amount to meet the annual limits.
Flexible Spending account (FSA) contribution limits have not increased for 2021. The max election for health is $2,750 and $5,000 for dependent care. These plans are typically a ‘use it or lose it’ scenario, where you must use these funds by the end of your plan year. However, companies can offer a grace period of up to 2.5 months. If you still have funds in the account as the grace period approaches, check with your employer to see if you can rollover up to $500 of your medical FSA account to the next year. The IRS allows for both the grace period and the rollover, but they must be approved through your plan administrator.
Bonus Tip – Pull your Credit Report
The three major credit bureaus – Equifax, Experian and Transunion have always offered free reports once a year. However, due to the Coronavirus crisis, they have allowed you to pull a free report once a week through April 2021. The main things to check are your name, addresses, credit accounts, collections and inquiries. If you find an error, contact the provider of the information (such as the credit card company) and ask them to fix the problem. You can also file a dispute directly with the credit reporting agency.
We are always here to help you with these topics and any other financial questions that you and your family may have. Please contact us at any time.
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