Retirement Savings: New Rules In 2021

Is there any good news for savers in 2021? A bit. Although the amount you can contribute to an IRA is unchanged, the income limits on deducting a traditional IRA or contributing to a Roth IRA have risen modestly. 

Social Security

Most Social Security beneficiaries will get a modest cost-of-living adjustment (COLA) in 2021.

In October, the Social Security Administration (SSA) announced a 1.3 percent COLA for Social Security and Supplementary Security Income (SSI) beneficiaries starting in January 2021. The average monthly Social Security retirement payment is up $20 to $1,543 from $1,523 in 2020. The maximum monthly Social Security benefit for a worker at full retirement age has risen $137 to $3,148 from $3,011 in 2020. Full retirement age is 66 years and 2 months for people born in 1955, and gradually rises to 67 for those born in 1960 or later.

The COLA affects other parts of Social Security as well. If you are receiving benefits before full retirement age and you work, you'll have $1 withheld from your benefits for every $2 you earn above $18,960 a year in 2021, up from $18,240 a year in 2020. Beginning at full retirement age, your benefits won't be reduced, no matter how much you earn, and your monthly check will be adjusted to compensate for any benefits withheld previously.

Even with the COLA, however, some see slightly lower increases in their monthly checks, because Medicare premiums are usually deducted from Social Security checks. Standard monthly premiums for Part B costs $3.90 more, rising to $148.50 in 2021, up from $144.60 in 2020.

Taxes

Taxes, too, will be different in 2021. Unfortunately, “different” doesn't mean “lower."

• Social Security payroll taxes. Start with the taxes for Social Security's Old-Age, Survivors, and Disability Insurance (OASDI). The payroll tax to fund the program is set at 6.2 percent for employers and 6.2 percent for employees. The self-employed pay the whole freight: 12.4 percent. The rate won't change in 2021. What will change, however, is the maximum amount of income to which that tax applies. In 2021, you pay OASDI tax on income up to $142,800, up from $137,700 in 2020. The rate for Medicare's Hospital Insurance (HI) program remains at 1.45 percent for employees and 1.45 percent for employers (2.9 percent for the self-employed). It applies to all income.
• Standard deduction. The standard deduction for couples filing joint federal income taxes in 2021 will rise to $25,100, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for tax year 2021, up $150. Are you at least 65 years old or blind? If so there's an additional standard deduction of $1,350 apiece for married couples, up $50 from 2020. It's $1,700 for filers who are single or heads of households. The amounts double if you are both 65 or older and blind.
• Medical expense deduction. For those who have heavy medical expenses, there's good news: Congress made permanent a temporary reduction in the income floor for deducting medical expenses. In 2020 and following tax years, you'll need to have medical expenses of at least 7.5 percent of adjusted gross income (AGI) to claim the deduction (vs. 10 percent in the past). If your AGI is $50,000, for example, you'll be able to deduct the amount that's above $3,750 from your federal income taxes. (And that's only if your total deductions are higher than the standard deduction.)
• Federal estate tax. The basic exclusion amount on the estates of people who die in 2021 is $11.7 million. That's up from $11.58 million for estates of people who died in 2020. It's double for couples. Keep in mind, however, that some states impose their own estate and inheritance taxes on top of the federal estate tax.

Originally posted on AARP