Understanding Changes to Retirement Plans in 2021

Recent legislation signed into law affects retirement plan contributions, distributions, and taxes for tax year 2020 and beyond.

Qualified charitable distributions from IRAs have been around for a number of years, but the 2017 Tax Cut and Jobs Act (TCJA) increased the standard deduction to $27,400 for married taxpayers and $13,850 for single taxpayers for tax year 2020.  These higher standard deductions mean most taxpayers will utilize the standard deduction and not itemize this deduction on their Federal income tax return.  By using the standard deduction, more taxpayers will receive no tax benefit from their charitable contributions.

Qualified charitable contributions are distributions by taxpayers at the required minimum distribution (RMD) age and older made directly from the taxpayer’s IRA account to a charitable organization.  These distributions are not taxable to the IRA owner. In addition, by reducing reportable income by this distribution, other tax benefits may be realized.  There are tax planning opportunities available to taxpayers who may benefit from qualified charitable contributions.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 made several important changes:

  1. The RMD age increased from 70 ½ to 72 for taxpayers born after June 30, 1949.  The RMD age of 70 ½ had been in existence since the 1960s.  The increase to age 72 is to account for longer life expectancy.  The beginning date for an RMD is April 1 of the year following the calendar year in which the taxpayer reaches the age of 72 if born after June 30, 1949, and remains age 70 ½ if born before July 1, 1949.
  2. The SECURE Act eliminated stretch IRAs in most situations.  Inherited qualified assets from the deaths of plan participants or IRA owners to non-spouse beneficiaries are generally required to be distributed within 10 years following the plan participant’s or IRA owner’s death.  Previously, the beneficiary of an inherited qualified asset could stretch distributions over their life expectancy.  Certain exceptions still exist for children or for a chronically ill beneficiary.
  3. Generally, a distribution from a retirement plan before age 59 ½ is subject to a 10% early withdrawal penalty on the amount included in income.  Beginning in 2020, eligible plan distributions up to $5,000 that pay for expenses related to birth or adoption of a child are penalty-free.  The $5,000 limit applies at the individual level.

In response to COVID-19, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Actin March 2020.  The CARES Act allowed a taxpayer under the age of 59 ½ to take an early distribution up to $100,000 from an IRA or retirement plan without incurring the 10% early distribution penalty if the distribution was received in 2020.  To be eligible, the distribution must be by a person who (or whose family) is diagnosed with COVID-19 or who is economically harmed by the Coronavirus.  Income arising from the distribution is spread out over three tax years unless the taxpayer elects to recognize it in one year.  The waiver of the 10% early distribution penalty related to Coronavirus expired in 2020.

Most recently, the Consolidated Appropriations Act, 2021(CAA) was signed into law.  This act contains two disaster-related items affecting retirement plan rules.  The first item is a waiver of the 10% early withdrawal penalty for a “qualified disaster distribution” from a retirement plan.  This item is limited to a cumulative distribution of $100,000 and other limits apply to this penalty waiver.  The second item increases the limit for a retirement plan loan taken as a result of a qualified disaster.  Normally, a participant loan cannot exceed 50% of the participant’s vested balance up to $50,000.  Retirement plan loans over this amount are considered taxable distributions.  The CAA increases the allowable amount of a loan from a retirement plan to $100,000 if the loan is made because of a qualified disaster, increasing the previous 50% requirement to 100% of the participant’s vested balance.  To be eligible for both provisions, the taxpayer’s main home must be located in a federally declared disaster area.

Taxpayers should consult with a tax advisor on how best to utilize these opportunities.

ERISA and Tax Code Pension and Retirement Plan Limits

 20202021
Deferral Limits for Plans  
   §401(k)$19,500$19,500
   §403(b)$19,500$19,500
   §457$19,500$19,500
   SIMPLE$13,500$13,500
Catch-Up Contributions for Participants Age 50 or Older  
   Other Than SIMPLE Plans$6,500$6,500
   SIMPLE Plans$3,000$3,000
Qualified Plans – Annual Compensation Limit$285,000$290,000
Defined Benefit Maximum Annual Benefit$230,000$230,000
Defined Contribution – Maximum Annual Addition$57,000$58,000
‘Key Employee’ in Top-Heavy Plan$185,000$185,000
To Determine Maximum Account Balance in ESOP Subject to 5-year Distribution Period$1,150,000$1,165,000
‘Highly Compensated Employee’ Threshold$130,000$130,000
To Determine Additional Account Balance Increments for ESOP Subject to 5-year Distribution Period$230,000$230,000
SEP Compensation Threshold for Participation$600$600
Definition of ‘Control Employee’ for Fringe Benefit Valuation  
   Reg. §1.61-21(f)(5)(i)$115,000$115,000
   Reg. §1.61-21(f)(5)(ii)$230,000$230,000

Individual Retirement Accounts

Individual Retirement Accounts20202021
Traditional IRAs  
   Contribution Limit$6,000$6,000
   Catch-Up Contribution for Participants Age 50 or Older$1,000$1,000
   Deduction Phase-Out Range (Modified AGI)  
      Married Filing Jointly and Participant in Employer Plan$104,000-$124,000$105,000-$125,000
      Married Filing Jointly and Spouse in Employer Plan$196,000-$206,000$198,000-$208,000
      Single or Head of Household and in Employer Plan$65,000-$75,000$66,000-$76,000
Roth IRAs  
   Contribution Limit$6,000$6,000
   Catch-Up Contribution for Participants Age 50 or Older$1,000$1,000
   Contribution Phase-Out Range (Modified AGI)  
      Married Filing Jointly$196,000-$206,000$198,000-$208,000
      Married Filing Separately$0-$10,000$0-$10,000
      Single or Head of Household$124,000-$139,000$125,000-$140,000

The Anderson ZurMuehlen Financial Institutions Team is pleased to be a resource to you. Please contact us for assistance!

This article was written by Steven Johnson, a CPA and Shareholder in the Tax and Valuation and Litigation Consulting department at Anderson ZurMuehlen in Helena, Montana.

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