Qualified Retirement Plan (QRP) Benefits and Contributions Limitations

Qualified retirement plans are popular for several reasons that include:

  • Contributions by employers are tax deductible.
  • Assets in the plans grow tax free.
  • They help companies to attract and retain the best employees.
  • There are tax incentives and credits available for starting plans.

Of course, every benefit from the IRS comes with rules and limitations. The benefits and contributions limits for qualified retirement plans are set out in Section 415 of the Internal Revenue Code.

In Notice 2020-79i, the IRS announced the changes for limits for 2021. Without using the paragraph, sub-paragraph, and sub-sub-paragraph numbers, here are some highlights of the 2021 changes shown in Notice 2020-79. Keep in mind that there are “rounding rules” in play in determining the dollar amounts.

Under a defined benefit plan, there was this change: A participant’s contribution to the plan (for those who separated from service before January 2021), using a multiplier of 1.0122 on their compensation, has a limit on compensation changed from $57,000 to $58,000 for 2021. In employee stock ownership plans subject to a 5-year distribution period, the maximum account balance is increased from $1,150,000 to $1,165,000.

The Code also provides that several retirement-related amounts are to be adjusted using the established cost-of-living adjustment. After taking the applicable rounding rules into account, the amounts for 2021 are as follows:

  1. The adjusted gross income limitations for determining the retirement savings contributions credit for married taxpayers filing jointly at specified levels have been increased as follows:
    1. $39,000 to $39,500
    2. $42,500 to $43,000
    3. $65,000 to $66,000
  2. The adjusted gross income limitations for determining the retirement savings contributions credit for taxpayers filing as head of household at specified levels have been increased from:
    1. $29,250 to $29,625
    2. $31,875 to $32,250
    3. $48,750 to $49,500
  3. For all other taxpayers, the adjusted gross income limitations for determining the retirement savings contributions credit at specified levels will be increased from:
    1. $19,500 to $19,750
    2. $21,250 to $21,500
    3. $32,500 to $33,000
  4. The applicable dollar amount under for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $104,000 to $105,000.
  5. The applicable dollar amount for all other taxpayers who are active participants (other than married taxpayers filing separate returns) is increased from $65,000 to $66,000.
  6. The applicable dollar amount for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $196,000 to $198,000.
  7. The deduction for taxpayers making contributions to a traditional IRA is phased out for single individuals and heads of household who are active participants in a qualified plan (or another retirement plan) and have adjusted gross incomes between $66,000 and $76,000, increased from between $65,000 and $75,000.
  8. For married couples filing jointly, if the spouse who makes the IRA contribution is an active participant, the income phase-out range is between $105,000 and $125,000, increased from between $104,000 and $124,000.
  9. For an IRA contributor who is not an active participant and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $198,000 and $208,000, increased from between $196,000 and $206,000.
  10. The adjusted gross income limitation for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $196,000 to $198,000. The adjusted gross income limitation for all other taxpayers (other than married taxpayers filing separate returns) is increased from $124,000 to $125,000.

Those are the high points in the Notice, but there is more and a lot of Tax Code paragraph references needed for reference. What you need is a tax expert who keeps up with all of this and can make your return audit resistant.

i 2021 Limitations Adjusted as Provided in Section 415(d), etc., IRS Notice 2020-79

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