2021 IRA Contributions – Start Planning Now

2021 IRA Contributions

Good news about 2021 IRA contribution limits? Not exactly…

I wish I could jump up and down and tell you that IRA contribution limits for 2021 have gone up tremendously and that you should be sure to take advantage of them. However, I cannot. Because inflation has been so low this year, there are not many changes. But that does not mean there are not opportunities for smart investors who act on this information quickly.

2020 to 2021 IRA Contribution Limit Changes

Compared to 2020, most retirement contributions are not changing in 2021. Maximum IRA contributions remain at $6,000, and 401(k) deferrals remain at $19,500.00. View all of the 2021 contribution limits.

One thing that has not changed is the intricacy of IRA deductions.

Factors that can dramatically affect deductions include:

  • Income limits
  • Marital status
  • Your employment status, specifically whether you have in an employer retirement plan or are self-employed

You can read more about IRA deductions on the IRS’s website.

Is a Roth IRA or Traditional IRA Better?

The one question that always comes up is, should I contribute to a Roth IRA or a Traditional IRA? While many factors contribute to making that decision, more likely than not, a Roth IRA will be the better long-term option if you are eligible. (I am writing this from years of experience and speaking to “most people,” so please make sure you consult with your tax advisor).

How Long Do I Have to Make a Contribution to My IRA for 2020?

This is where a little planning can go a long way. A majority of individuals wait until April 15th of the following year to make their IRA contributions. This has become the norm, but it is not the best financial planning move.

If you have the money, fund your IRA as soon as the new year begins. If you do not have the full contribution amount at the beginning of the year, start by making bi-weekly or monthly contributions. A few years ago, I wrote an article that is still true, showing the tremendous benefits of making an IRA contribution early vs. waiting until April 15th of the following year. Ed Slott, one of the nation’s IRA experts, has a quote I would like to share. He says, “Most people treat IRA Contributions like they’re paying a bill, [but] they should think about it as paying themselves.”

I always like the financial rule of paying yourself first. By making your IRA contribution as early as possible, you are setting yourself up for financial success.

There may be some good news and changes coming to retirement accounts. November 2020 saw a bipartisan bill introduced in the House to increase contributions and raise the age for required minimum distributions (RMD’s). The word bipartisan does not come up very often, so I think this may be good news. A summary of the bill is listed on CNBC’s website.

How Can Midland Help You Navigate IRA Contributions?

Midland is happy to help you with your IRA questions. We have many resources to share with you and many years of experience answering questions just like the ones you have right now. Please contact Midland by calling (239) 333-1032 or by visiting our website.

Author: Dave Owens, CPA, CES, is the President & CEO of Midland IRA. His comments act as guidance to help investors understand how to navigate and plan for IRA contributions.

MIDLAND TRUST COMPANY, NOR ITS AFFILIATES OR SUBSIDIARIES (COLLECTIVELY REFERRED TO AS “MIDLAND”), IS NOT A FIDUCIARY: Midland’s role as the Custodian and/or Administrator of self-directed retirement accounts is non-discretionary and/or administrative in nature. The account holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account, and is responsible for conducting his/her own due diligence. Midland has no responsibility or involvement in selecting or evaluating any investment and does not conduct any due diligence on any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.

Required Minimum Distributions (RMD) in an IRA: The Basics

required minimum distributions in an ira - the basics

If you have a Traditional IRA and you are 72, you have a required minimum distribution or RMD. For every pre-tax retirement plan, you must take a taxable distribution on an annual basis. The amount you are required to withdraw is determined by the prior year-end balance, your age, and sometimes your beneficiary’s age (if the primary beneficiary is your spouse). Several websites offer easy-to-use RMD calculators, including the one found at www.MidlandTrust.com.

RMD Deadlines & Penalties

The deadline to withdraw any RMD is December 31. The penalty for not taking an RMD by the deadline is 50% of any amount not withdrawn.

For example, Mary, 73, has a Traditional IRA account. She is required to take an RMD of $6,000.00. Mary only withdraws $4,000.00. She is then taxed 50% on the $2,000.00 amount not withdrawn. She must pay the IRS a penalty of $1,000.00.

Important RMD Changes in 2020

In December 2019, the SECURE Act passed, which made several changes to tax laws, including RMDs. Beginning January 1, 2020, the RMD age was extended from 70.5 to 72. This change did not affect anyone who was already 70.5 or older and taking RMDs.

No Cash? No Problem!

If you have a self-directed IRA, then you may have investments that cannot be easily liquidated. A non-cash asset can be withdrawn from the IRA to satisfy the RMD. The account holder will need to provide a current and acceptable valuation and any necessary re-registration paperwork. For example, Fred is holding real estate in his IRA. His RMD is $30,000.00. Fred obtains a certified appraisal for one of his account properties, valued at $50,000.00. Fred can distribute all or a part of the property. He will need to have a Deed prepared to re-title all or a percentage of the asset.

Discuss Your RMD With a CPA

If you are already 72 or older and have not yet taken an RMD, you should speak with your CPA to discuss the best course of action. If you are turning 72 in 2020 or in the near future, you may want to meet with your CPA to discuss how taking taxable distributions will affect your income status. When faced with the 50% penalty, your CPA may be able to help you weigh the pros and cons of the payout versus the potential expenses associated with taking the RMD.

Review of RMD Quick Facts

Important RMD Dates

  • January 1, 2020 – those who turned 70.5 before this date and have a pre-tax retirement plan must take an RMD for 2019
  • January 1, 2021 – those who turn 72 before this date and have a pre-tax retirement plan must take an RMD for 2020
  • December 31 – deadline to withdraw your RMD for that calendar year

Important RMD Rules

  • 50% tax penalty for not taking an RMD
  • Each pre-tax retirement plan has a separate RMD amount

Important RMD Information

  • RMD can be satisfied by cash or non-cash withdrawals
  • Asset values should be updated annually to calculate an RMD accurately
  • A non-cash distribution will require a current validation for 1099 reporting
  • Speaking with a tax professional each year may help in avoiding penalties or additional taxes

For more information on Required Minimum Distributions (RMDs) in your self-directed retirement account, feel free to contact Midland.

MIDLAND TRUST IS NOT A FIDUCIARY: Midland’s role as the custodian of self-directed retirement accounts is non-discretionary and administrative in nature. The account holder or authorized representative must direct all investment transactions and choose the account’s investment(s). Midland has no responsibility or involvement in selecting or evaluating any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.