2021 Cost of Living Adjustments (COLA) Announced

Written by: Marshall Heitzman, CFP®, ChFC, FLMI, CPCU, BFA™

Dec 15, 2020 Share This 


2021_Cola_updatesMuch like the rest of us, the Internal Revenue Service (IRS) is looking ahead to 2021, having recently released cost of living adjustments (COLA) for Tax Brackets and IRA contributions.  

Investors who contribute the annual maximums to IRAs will be interested to know the contribution limit to either a Traditional or Roth IRA, or both in combination, for the 2021 tax year will remain $6,000, plus up to an additional $1,000 catch-up contribution for a total of $7,000 for those over age 50, assuming there is eligible earned income.1

While contribution limits have not changed, income limits for Traditional IRA deductibility and Roth contribution eligibility did inch upward slightly. Here’s a snapshot of some of the COLA updates for 2021.

Traditional IRAs

Anyone with earned income can make a Traditional IRA contribution. The question remains whether it is deductible from income taxes. Traditional IRA contributors who are not covered by a retirement plan at work may deduct in full up to their contribution limit. 

For 2021, Single filers who are covered by an employer retirement plan with Modified Adjusted Gross Income (MAGI) less than $66,000 can deduct a full Traditional IRA contribution. There is no deduction allowed for income over $76,000, and the contribution deductibility is prorated for income between $66,000 – $76,000.1 

The same deduction test applies for Married Filing Jointly investors with incomes between $105,000 – $125,000. If their combined income is below $105,000, both spouses can deduct their Traditional IRA contributions. Combined income over $125,000 eliminates deductibility, unless either spouse is not covered by an employer retirement plan through work. 

If only one spouse is covered by an employer retirement plan through work, the other, non-covered, spouse is entitled to a higher phaseout range for deductibility.  With MFJ income under $198,000, the uncovered spouse may deduct a full contribution, and gets a prorated deduction for income within a range of $198,000-$208,000.1

Roth IRAs

Roth IRAs are never deductible, but income limits apply to someone’s ability to make contributions. Single filers can make a Roth contribution if their income is below $125,000, but no Roth contributions can be made if they make over $140,000. Anything in between is prorated, but partial contributions can be made depending on where income falls in the range.1

Married Filing Jointly investors can make Roth IRA contributions if their combined income is below $198,000, and it’s reduced proportionately for income up to $208,000. That’s the top income limit over which no Roth IRA contributions are permitted for either spouse.1

Options for Higher Earners

All is not lost for higher earners, though. Small business owners often have numerous employer plans with much higher contribution limits available to them. 

A Simplified Employee Pension (SEP) IRA, for example, permits a percentage of income contributions up to $58,000, associated with maximum SEP covered compensation up to $290,000 in 2021 alone.2 An eligible, highly compensated employee may be provided significant contributions over the years to create a sizable SEP IRA balance.  

And savvy investors can, of course, direct these investments into products such as annuities to create their own personal pensions with all the risk control and income guarantees their chosen annuity provides.

Taxes can be confusing and, just when you think you may have a grasp on the latest investment contribution limits or eligibility parameters, things change. As always, your clients should consult a tax professional to fully understand any tax implications, but you may be able to shed some light on how COLA may impact their retirement strategy. For an easy reference guide on the new 2021 contribution limits, simply click the link below.



Marshall Heitzman
Written by: Marshall Heitzman, CFP®, ChFC, FLMI, CPCU, BFA™

Marshall is CUNA Mutual Group's Advanced Planning Expert and has more than 25 years experience in the insurance and financial services industry. He consults Financial Advisors on advanced retirement planning concepts for retirement and wealth management clients.


1 IRS, Income Ranges for Determining IRA Eligibility Change for 2021, October 26, 2020

2 IRS, COLA Increases for Dollar Limitations on Benefits and Contributions, November 2, 2020


Topics: Advanced Planning