Get Pumped — 2021 Roth IRA Income Ranges Have Increased!

If the pandemic caused you to ditch your retirement savings goals in 2020, don’t beat yourself up. The IRS just released 2021 contribution and income limits for retirement accounts that can put you back on track. You’ll want to pay close attention to the Roth IRA since the income limits have increased — a great opportunity to capitalize on one of America’s most coveted savings sensations.

A retirement goodie too good to ignore 

The Roth IRA is undeniably appealing — allowing you to contribute after-tax dollars that will grow tax-free in an individual retirement account. In other words, if you grow your Roth IRA to a million dollars, the entire one million dollars in your account is yours after you reach 59 ½ and have met the five-year rule — no need to split the pie with the IRS.

For 2021, the annual Roth IRA contribution limits remain the same: $6,000 for people under 50 and $7,000 for people 50 and up. Setting aside $500 every month for 12 months will allow you to max out your account and invest in your favorite stocks. Remember, you are not required to put a certain amount of money in your account every year, but if you do, your contributions are limited to the lesser of your earned income or the annual contribution limit — if you only earn $4,000 during the year, that is the most you can contribute to a Roth IRA.

The beauty of the Roth IRA is that anyone can contribute — as long as you have earned income for the year that falls below the income limit, you can open an account and start saving! It doesn’t matter if you already have a workplace retirement account like a 401(k), just started your first job at age 16, or are 70 years old and have already retired; you can still make contributions to a Roth IRA. 

A bigger boost in 2021 

Although you are required to have earned income to contribute to a Roth IRA, there’s a caveat: if you earn too much money, you won’t be able to make direct contributions to a Roth IRA. Your money-making number that the IRS cares about is your modified adjusted gross income (MAGI) –a small tweak to your adjusted gross income that includes some deductions that were previously removed from your tax calculation. Your MAGI is the number that stands between you and your eligibility to contribute to a Roth IRA. 

That’s why the increase in income ranges for 2021 is such a big deal. The income range is wider, meaning more people will be able to contribute to a Roth IRA. If you weren’t able to contribute in 2020 because your income was too high, your income may qualify in 2021 thanks to the IRS income range boost. Single filers can earn up to $125,000 (up from $124,000 in 2020) and married couples filing jointly can earn up to $198,000 (up from $196,000 in 2020). That’s a $1,000 increase for single filers and a $2,000 increase for married couples filing jointly. 

Unfortunately, you can only contribute a reduced amount to a Roth IRA if your income falls within the danger zone — more commonly referred to as “phase-out range”. This means your ability to take full advantage of the Roth IRA has just decreased and you’ll have reduced contribution limits. Once you’ve reached the highest amount in the phase-out range, you can no longer make a direct contribution to a Roth IRA at all.

Roth IRA Income Phase-Out Ranges 

Data source: IRS.

Don’t let a good thing pass you by 

Your income won’t stay the same forever. If you’re within the range to contribute to a Roth, do your research and take advantage of the opportunity to fund your account, invest for the long-term, and enjoy a tax-free stream of income during retirement. 

But if you’ve already missed the mark to make direct contributions to a Roth because your income is too high, you don’t have to live with regrets. A Backdoor Roth IRA — a strategic way to make non-deductible contributions to a traditional IRA and convert it to a Roth — can be the next best thing to help you achieve your retirement dreams!