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Retirement Savings: New Rules In 2021

Capital Gains Tax
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EDITOR NOTE: Perhaps the best way to preface this article on tax changes in 2021 is by way of analogy. There are plenty of things you can do to improve your house--to make it more organized, more efficient, downplaying its flaws, and optimizing its potential. But if the structure of your home is weakening or damaged, anything you do to improve it above its foundation is pointless. Your retirement savings is a tax-advantaged financial “shelter”--a home for your money, and your future lifestyle. The tax changes for 2021--and there are lots of them, pros and cons combined--are all explained below. We’ll leave it to you to seek out the relevant details (as it varies from person to person). But no matter what you do to optimize your tax advantages, bear in mind that the foundation of your wealth--in our case the US dollar--is enervated and bound to collapse under the weight of inflationary pressure. We recommend protecting your wealth by purchasing non-CUSIP gold and silver, and stashing your holdings in a precious metals iRA. Diversification is everything when it comes to your retirement portfolio. Unfortunately, in our era of heightened fiscal spending amid a ballooning national debt, diversifying across dollar-based assets will not be enough to protect your wealth and financial future.

Most people will miss 2020 about as much as they miss mosquito season. For many retirees and retirement savers, the year had a few benefits, such as some COVID-19 relief measures. Even without those, however, most of the retirement changes in 2021 are for the better. Here's a look at some of the most important you need to know.

Retirement savings plans

The Coronavirus Aid, Relief, and Economic Security Act, better known as the CARES Act, gave some big breaks to retirement savers. They are deader than Marley's ghost in 2021.

  • Required minimum distributions (RMDs). The CARES Act gave savers the ability to skip RMDs in 2020. An 80-year-old man who had $50,000 in his individual retirement account (IRA) at the end of 2019, for example, would have normally been required to withdraw $2,673.80 in 2020 and pay income tax on that withdrawal. He didn't have to do that in 2020, but he will have to restart taking RMDs in 2021.
  • Retirement plan withdrawals. The CARES Act also allowed people younger than 59 1/2 to take up to $100,000 from their retirement accounts in 2020 without the usual 10 percent penalty. Furthermore, it allowed people to spread out the tax on their retirement plan withdrawal over three years — and to replace that money in their accounts if they wanted to. (The withdrawals had to be COVID-related.) The early withdrawal penalty is back in 2021, and income on withdrawals will count as income for the 2021 tax year. However, the COVID-Related Tax Relief Act of 2020 (COVIDTRA) allows for the same treatment of retirement plan withdrawals made because of qualified disasters. To qualify, taxpayers must have lived in a qualified disaster area and suffered financial loss because of that disaster.
  • Retirement plan loans. The CARES Act allowed savers in 401(k) plans to borrow as much as $100,000 from their accounts, up from $50,000 in 2019, and to defer payments on those loans for a year. That change has been expanded into 2021, but you must meet the qualified disaster requirements listed above.

The amount you can contribute to retirement plans won't change in 2021. IRA investors can sock away $6,000 a year in 2021, and those 50 or older can add another $1,000, for a total annual contribution of $7,000. Investors in 401(k) plans and other similar workplace retirement plans, such as 403(b) plans, can invest $19,500 in 2021, also the same as 2020, with an additional $6,500 for those 50 and older.

Is there any good news for savers in 2021? A bit. Although the amount you can contribute to an IRA is unchanged, the income limits on deducting a traditional IRA or contributing to a Roth IRA have risen modestly. 

2021 Income Limits for Deductible Contributions

Traditional IRA Accounts

Filing status: Single

  • 100% deductible income limit = $66,000  
  • Not deductible for incomes above $76,000
  • Those with incomes between upper and lower limits may make partially deductible contributions

Filing status: Married filing jointly (contributor has work retirement plan, spouse doesn't)

  • 100% deductible income limit = $105,000
  • Not deductible for incomes above $125,000
  • Those with incomes between upper and lower limits may make partially deductible contributions

Filing status: Married filing jointly (contributor does not have a work retirement plan, spouse does)

  • 100% deductible income limit = $198,000
  • Not deductible for incomes above $208,000
  • Those with incomes between upper and lower limits may make partially deductible contributions

If you, (or you and your spouse if filing jointly) don’t have a retirement plan at work, 100% of your contribution to a traditional IRA is deductible regardless of income.


Roth IRA Accounts

Roth IRA contributions are not tax deductible, but withdrawals are tax free in retirement. Annual contributions are limited by income:

Filing status: Single

  • Full contribution below = $125,000  
  • No contribution above $140,000
  • Those with incomes between upper and lower limits may make partially deductible contributions

Filing status: Married filing jointly

  • Full contribution below = $198,000
  • Not deductible for incomes above $208,000
  • Those with incomes between upper and lower limits may make partially deductible contributions

Social Security

Most Social Security beneficiaries will get a modest cost-of-living adjustment (COLA) in 2021.

In October, the Social Security Administration (SSA) announced a 1.3 percent COLA for Social Security and Supplementary Security Income (SSI) beneficiaries starting in January 2021. The average monthly Social Security retirement payment is up $20 to $1,543 from $1,523 in 2020. The maximum monthly Social Security benefit for a worker at full retirement age has risen $137 to $3,148 from $3,011 in 2020. Full retirement age is 66 years and 2 months for people born in 1955, and gradually rises to 67 for those born in 1960 or later.

The COLA affects other parts of Social Security as well. If you are receiving benefits before full retirement age and you work, you'll have $1 withheld from your benefits for every $2 you earn above $18,960 a year in 2021, up from $18,240 a year in 2020. Beginning at full retirement age, your benefits won't be reduced, no matter how much you earn, and your monthly check will be adjusted to compensate for any benefits withheld previously.

Even with the COLA, however, some see slightly lower increases in their monthly checks, because Medicare premiums are usually deducted from Social Security checks. Standard monthly premiums for Part B costs $3.90 more, rising to $148.50 in 2021, up from $144.60 in 2020.

Taxes

Taxes, too, will be different in 2021. Unfortunately, “different” doesn't mean “lower."

  • Social Security payroll taxes. Start with the taxes for Social Security's Old-Age, Survivors, and Disability Insurance (OASDI). The payroll tax to fund the program is set at 6.2 percent for employers and 6.2 percent for employees. The self-employed pay the whole freight: 12.4 percent. The rate won't change in 2021. What will change, however, is the maximum amount of income to which that tax applies. In 2021, you pay OASDI tax on income up to $142,800, up from $137,700 in 2020. The rate for Medicare's Hospital Insurance (HI) program remains at 1.45 percent for employees and 1.45 percent for employers (2.9 percent for the self-employed). It applies to all income.
  • Standard deduction. The standard deduction for couples filing joint federal income taxes in 2021 will rise to $25,100, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for tax year 2021, up $150. Are you at least 65 years old or blind? If so there's an additional standard deduction of $1,350 apiece for married couples, up $50 from 2020. It's $1,700 for filers who are single or heads of households. The amounts double if you are both 65 or older and blind.
  • Medical expense deduction. For those who have heavy medical expenses, there's good news: Congress made permanent a temporary reduction in the income floor for deducting medical expenses. In 2020 and following tax years, you'll need to have medical expenses of at least 7.5 percent of adjusted gross income (AGI) to claim the deduction (vs. 10 percent in the past). If your AGI is $50,000, for example, you'll be able to deduct the amount that's above $3,750 from your federal income taxes. (And that's only if your total deductions are higher than the standard deduction.)
  • Federal estate tax. The basic exclusion amount on the estates of people who die in 2021 is $11.7 million. That's up from $11.58 million for estates of people who died in 2020. It's double for couples. Keep in mind, however, that some states impose their own estate and inheritance taxes on top of the federal estate tax.

Originally posted on AARP

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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