IRA and 401(k) Contribution Limits Update 2021
The Internal Revenue Service (IRS) adjusts the IRA and 401(k) contribution limits every year against changes to the cost of living and inflation.
This doesn’t mean that there is an increase in the contribution limits every year though. Sometimes the IRS keeps the contribution limits the same as it was the year prior.
IRA Contribution Limit Didn’t Increase
For the 2021 tax year, the IRS decided to keep the contribution limits for IRAs (Individual Retirement Account) the same as it was in 2020. So the IRA contribution limits 2021 is $6,000. But, if you’re 50 or older, you get an additional $1,000 to contribute with the catch-up contribution.
401(k) Contribution Limit Increase
While the IRA contribution limits are the same as it was, the 401(k) contribution limits saw an increase. Starting from January 1, 2021, employees are able to contribute up to $19,500 to their 401(k) plans. Same as the IRA, those who are aged 50 or older get an additional contribution amount. While it’s $1,000 for IRAs, it’s $6,500 for 401(k) – totaling the contribution limit at $26,000.
Tax Benefits of Retirement Contributions
The Internal Revenue Service helps taxpayers who have contributed to their retirement plans. Unless you have a Roth IRA or Roth 401(k), you can deduct the contributions made.
So if you have a traditional IRA or 401(k), you get a deduction for your contributions. What’s the perfect deal with these deductions is that you aren’t required to itemize deductions. You can simply take a deduction for your retirement account contributions with the standard deduction. This is because these deductions are found on Additional Income and Adjustments to Income – Schedule 1.
The IRA and 401(k) contributions deduction will help you lower your adjusted gross income as that’s the purpose of the Schedule 1 and help you qualify for further tax deductions and credits.