2021 Retirement Plan Limits

2021 Retirement Plan Limits

As part of your 2021 tax planning, now is the time to review funding your retirement accounts. By establishing your contribution goals at the beginning of each year, the financial impact of saving for your future should be more manageable. Here are annual contribution limits for 2021:

Plan20202021Change
SIMPLE
IRA
Annual Contribution
50 or over catch-up
$13,500
Add $3,000
$13,500
Add $3,000
No Change
No Change
401(k), 403(b),
457 and
SARSEP
Annual Contribution
50 or over catch-up
$19,500
Add $6,500
$19,500
Add $6,500
No Change
No Change
Traditional
IRA
Annual Contribution
50 or over catch-up
$6,000
Add $1,000
$6,000
Add $1,000
No Change
No Change
AGI Deduction Phaseouts:Single; Head of Household
Joint nonparticipating spouse
Joint participating spouse
Married Filing Separately
(any spouse participating)
65,000 – 75,000
196,000 – 206,000
104,000 – 124,000
0 – 10,000
66,000 – 76,000
198,000 – 208,000
105,000 – 125,000
0 – 10,000
+ $1,000
+ $2,000
+ $1,000
No Change
Roth
IRA
Annual Contribution
50 or over catch-up
$6,000
Add $1,000
$6,000
Add $1,000
No Change
No Change
Contribution
Eligibility
Single; Head of Household
Married Filing Jointly
Married Filing Separately
124,000 – 139,000
196,000 – 206,000
0 – 10,000
125,000 – 140,000
198,000 – 208,000
0 – 10,000
+ $1,000
+ $2,000
0 – 10,000
Rollover to Roth EligibilityJoint, Single, or Head of Household
Married Filing Separately
No AGI Limit
Allowed / No AGI Limit
No AGI Limit
Allowed / No AGI Limit
No AGI Limit
Allowed / No AGI Limit

Take action

If you have not already done so, please consider:

  • Reviewing and adjusting your periodic contributions to your retirement savings accounts to take full advantage of the tax advantaged limits
  • Setting up new accounts for a spouse or dependent(s)
  • Using this time to review the status of your retirement plan
  • Reviewing contributions to other tax-advantaged plans including flexible spending accounts and health savings accounts
Expenses Are Now Tax PPP Loan Deductible

Expenses Are Now Tax PPP Loan Deductible

If you or your business received funds from the Paycheck Protection Program (PPP), the recently passed Emergency Coronavirus Relief Act of 2020 will help to dramatically cut your tax bill. Here’s what you need to know.

Background

The PPP program was created by the CARES Act in March 2020 to help businesses which were adversely affected by the COVID-19 pandemic. Qualified businesses could apply for and receive loans of up to $10 million. Loan proceeds could be used to pay for certain expenses incurred by a business, including salaries and wages, other employee benefits, rent and utilities.

If the business used at least 60% of loan proceeds towards payroll expenses, the entire amount of the loan would be forgiven.

The Dilemma

While the CARES Act spelled out that a business’s forgiven PPP loan would not be considered taxable income, the legislation was silent about how to treat expenses paid for using PPP loan proceeds if the loan was ultimately forgiven.

Congress intended for these expenses to be deductible for federal tax purposes. But since the legislation was silent on this issue, the IRS swooped in and deemed these expenses to be nondeductible.

There was considerable debate over the latter half of 2020, with Congressional politicians explaining that their intent was that the expenses be deductible and the IRS responding “Too bad, they’re nondeductible.”

The Solution

Congress overruled the IRS’s position in the Emergency Coronavirus Relief Act of 2020. The legislation officially makes deductible for federal tax purposes all expenses paid for using proceeds from a forgiven PPP loan.

Stay tuned for updates as to how this new legislation affects your business.

Ideas For Better Savings Rates

Ideas For Better Savings Rates

Before the housing bubble burst in 2008, you could find high yield savings accounts that were paying rates over 5.0 percent. Today? These same banks are paying less than .10 percent.

So where are you supposed to put your money? Is there anywhere else you can put your hard-earned cash and generate a modest return? Here are several suggestions.

  • Social Lending. Consider a social lending site like LendingClub, a peer-to-peer loan network that allows you to invest in other people’s loans. Typical rates that you can earn range between seven and 20 percent. There is a required initial deposit of at least $1,000.

    Risks: Social lending is not for the faint of heart. You are acting as a bank and have to be prepared to take loan losses…just like a bank.
  • Brokerage Accounts. Brokerage accounts often have a number of options to earn ongoing interest higher than most banks. It includes investing in dividend-bearing stocks, bonds, and other CDs. Many of these options will provide higher savings yields than banks, but you need to know the risks of your options before you invest.

    Risks: Each product offered within your brokerage account will have its own risks. For instance, dividend stock returns are not guaranteed and underlying shares can lose value. So never invest in something you don’t understand. The good news is many investment savings alternatives are insured by the FDIC and SIPC.
  • High Yield Savings Accounts. High yield accounts don’t have very high interest rates. But an account earning .4% to .7% is better than nothing. For a balance of $30,000, this yields about $200 annually. These types of accounts can be found at both online and brick-and-mortar banks and typically pay a better rate than traditional savings and checking accounts.

    Risks: Only choose well-respected, well-managed institutions when selecting an online account. And as always, be especially careful to take security precautions when moving funds online. Also double check to ensure your funds are FDIC insured.

The low rate environment is being influenced by the vast spending of the federal government. So until the fed moves rates up, you are going to need to stay vigilant to try to keep your hard-earned savings rates above the rate of inflation.

 

A Happy Banker Makes for a Happy Business

A Happy Banker Makes for a Happy Business

With the onset of COVID-19, small business banks are more nervous about potential loan losses than ever. Here are several tips for your business to maintain a great working relationship with your lender. These same tips can also be used if you want to plant seeds with your banker for potential future loans.

  • Produce timely financial statements. Your lender may require you to produce financial statements over the duration of your loans to ensure that you have enough cash to make consistent, on-time payments. Strive to produce up-to-date financial statements and send them to your bank before they ask for them. Not only will timely financial statements make your lenders happy, the pro-active nature of your financials will show a level of transparency to them. Be prepared to include a note explaining major changes and schedule regular phone calls to go over the business.
  • Implement solid internal controls. How does a lender have faith that the dollar amounts on your financial statements are accurate? By properly implementing internal controls. You’ll have a happy banker if your company can provide evidence that your internal controls are operating properly.
  • Communicate. If your business encounters turbulent financial waters, the best thing to do is immediately let your lender know about it. Better yet, by keeping in constant communication, your lender will most likely be able to spot if your business starts experiencing a downturn and will try devising a plan before you begin missing payment deadlines.

Remember, your banker probably has their hands full right now. These tips allow them to spend more time on their problem loans, and one of them will not be yours.

Retirement Savings Tips for Small Business Owners

Retirement Savings Tips for Small Business Owners

As an owner of a small business, you’ve proven that you’re a self-starter by operating a successful private enterprise. Of equal importance is applying your skills towards saving for your future. Here are some of the most popular tax-advantaged retirement vehicles for small business owners in 2020 and some tips on saving for retirement.

Options if you’re not currently enrolled in a plan

For small business owners not currently enrolled in a retirement plan, here are three of the most popular retirement account options:

  • Simplified Employee Pension (SEP) IRA Account. Contribute as much as 25% of your business’s net profit up to $57,000 for 2020.
  • 401(k) Plan. Contribute up to $57,000 of your salary and/or your business’s net profit.
  • Savings Incentive Match Plan for Employees (SIMPLE) IRA Account. You can put all your business’s net profit in the plan, up to $13,500 plus an additional $3,000 if you’re 50 or older.

Which plan should you choose? SEP and SIMPLE IRAs are ideal for either sole proprietors or really small businesses (no more than one or two dozen employees). Due to higher administrative costs, 401(k) plans are usually more suited for larger small businesses (more than one or two dozen employees).

Tips to maximize your retirement contributions

For small business owners who are currently enrolled in a retirement plan, here are some suggestions for maximizing your annual contributions into your retirement accounts:

Pay yourself first. Instead of funding your retirement account with whatever is left over after paying your monthly bills, decide at the beginning of each month how much you want to set aside to fund your retirement. Make funding your retirement each month as important as your other bills. Then assume that you pay your retirement bill first. If you run out of money before paying all your bills, decide if there are any expenses that can be pared back for subsequent months so you can meet your monthly retirement savings goal.

List your retirement contributions on your income statement. It is easy to forget about retirement planning when running the day-to-day operations of your business. To keep retirement contributions top-of-mind, record these as a separate line item on your business’s income statement.

Review your tax situation at least twice a year. Tax planning is now more important than ever with the uncertainty caused by the recent pandemic. So review your tax situation at least twice every 12 months to see how to maximize each year’s retirement contributions.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

Social Security Benefits Increase in 2021

Social Security Benefits Increase in 2021

Estimated average Social Security retirement benefits starting January 2021

  • All retired workers in 2020 $1,523/mo
  • All retired workers in 2021 $1,543/mo

Did you know? You can increase your Social Security retirement benefits by 5-8% when you delay applying until you’re age 70.

1.6% cost of living adjustment for Social Security retirement benefits and SSI payments begins with the December 2020 benefits (payable in January 2021).

The 2021 maximum Social Security retirement benefits a worker retiring at full retirement age is $3,148/mo.

Did you know…

97% of U.S. citizens over age 60 either receive Social Security or will receive it in the future.

1 in 4 seniors expect Social Security to be their primary source of income.

Social Security pays benefits to more than 70 million people including retirees, children and surviving spouses.

2021 Social Security and Medicare tax rates

If you work for someone else…

  • your employer pays 7.65%
  • you pay 7.65%

If you’re self-employed…

  • you pay 15.3%

Note: The above tax rates are a combination of 6.2% for Social Security and 1.45% for Medicare. There is also 0.9% Medicare wages surtax for those with wages above $200,000 single ($250,000 joint filers) that is not reflected in these figures.

  Maximum amount you can pay in Social Security taxes
2020: $8,537.402021: $8,853.60

165+ million people work and pay Social Security taxes.

Social Security has provided financial protection for Americans since 1935.

  Maximum earnings amount Social Security will tax at 6.2%
2020: $137,7002021: $142,800

How does Social Security work?

  • When you work, you pay taxes into Social Security.
  • The Social Security Administration used your tax money to pay benefits to people right now.
  • Any unused money goes to the Social Security trust funds.
  • Later on when you retire, you receive benefits.

Social Security payments explained

SS Social Security retirement benefits are for people who have “paid into” the Social Security system through taxable income.

SSD or SSDI Social Security Disability (SSD or SSDI) benefits are for people who have disabilities but have “paid into” the Social Security system through taxable income.

SSI Supplemental Security Income (SSI) benefits are for adults and children who have disabilities, plus limited income and resources.

  Maximum SSI payments20202021
Individual$783/mo$794/mo
Couple$1,175/mo$1,191/mo

Here’s how to qualify for your retirement benefits

When you work and pay Social Security taxes, you earn “credits” toward Social Security benefits. The number of credits you need to get retirement benefits depends on when you were born.

If you were born in 1929 or later, you need 40 credits (10 years of work) to receive Social Security retirement benefits.

The earnings needed for a credit in 2021 is $1,470.

4 credits maximum per year.

Did you know you can check your benefits status before you retire?

You can check online by creating a my Social Security account on the SSA website. If you don’t have an account, you’ll be mailed a paper Social Security statement 3 months before your 61st birthday.

It shows your year-by-year earnings, and estimates of retirement, survivors and disability benefits you and your family may be able to receive now and in the future.

If it doesn’t show earnings from a state or local government employer, contact them. The work may not have been covered either by a Section 218 agreement or by federal law.

Sources: SSA.gov