Key Reminders as 2021 Approaches

We are on the cusp of a new year, and there are some important developments to keep in mind as 2021 arrives. 

Required Minimum Distributions

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, enacted on Dec. 20, 2019, raised the age for required minimum distributions (RMDs) to 72 and removed the age limit for contributions to traditional IRAs beginning in 2020. 

But the SECURE Act was not the only major piece of legislation in the last 12 months to affect RMDs. The Coronavirus, Aid, Relief and Economic Security (CARES) Act, which President Trump signed into law on March 27, waived RMDs for 2020. However, RMDs will be back in 2021. An additional consideration is that if one did not take an RMD in 2020, there could be a higher account balance from which an RMD will be drawn in 2021—and since those distributions are taxable, that could spell higher taxes than would have been imposed if the requirement for RMDs had not been waived in 2020. 

Qualified Plan Loans

The IRS released final regulations Dec. 7 relating to amendments made by the Tax Cuts and Jobs Act (TCJA) providing an extended rollover period for a qualified plan loan offset (QPLO). The final regulations permit an extension beyond the normal 60-day period to roll over the amount of loans from certain retirement plans, including 401(k) profit sharing plans, 403(b) plans and 457(b) plans, that are offset and treated as distributions.

These final regulations largely adopt the proposed regulations released in August 2020, except for a change to the effective date. Under the final regulations, the revised applicability date will apply to plan loan offset amounts—including QPLO amounts—treated as distributed on or after Jan. 1, 2021. Thus, for example, the rules in Treas. Reg. §1.402(c)-3 will first apply to 2021 Form 1099-Rs required to be filed and furnished in 2022 (more than one year after the date of publication of the final regulations). 

Compensation Limits 

Remember the contribution and benefit limits the IRS set for 2021. These include:

• The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b) most 457 plans for 2021 is 6,500, the same as the rate for 2020; the rate for 2019 and 2018 was $6,000.
• The limitation on deferrals under Internal Revenue Code Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is $19,500 for 2021, the same level as 2020. The 2019, 2018 and 2017 levels were $19,000, $18,500 and $18,000, respectively.
• The annual compensation limitation under Code Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, for 2021 is 430,000; the levels in 2020, 2019, 2018 and 2017 had been $425,000, $415,000, $405,000 and $400,000, respectively.
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction in 2021 is phased out if the couple’s income is between $198,000 and $208,000; the 2020 levels were $196,000 and $206,000, respectively; those for 2019 levels were $193,000 and $203,000.
• The AGI phase-out range for taxpayers making contributions to a Roth IRA in 2021 is $198,000 to $208,000 for married couples filing jointly; the 2020 range was $196,000 to $206,000, and that of 2019 was $193,000 to $203,000. For singles and heads of household, the income phase-out range is $125,000 to $140,000; the 2020 range was $124,000 to $139,000, and that of 2019 was $122,000 to $137,000.