You have until December 31 to stash the maximum $19,500—or up to $26,000 if you’re 50 or older by the end of the year—in a 401(k) and until April 15, 2022, to contribute the maximum $6,000 (or $7,000 if you’re 50 or older) for 2021 to your IRA. Contributions to 401(k) accounts aren’t included in your taxable income. If you’re not eligible for a workplace retirement plan, or your income falls below specific thresholds, you can deduct contributions to a traditional IRA. In both cases, your contributions will lower your 2021 tax bill.
If you were self-employed or had a side hustle in 2021, you can save even more in a tax-advantaged account. As both employee and employer, for 2021, you can contribute up to $58,000 ($64,500 if you’re 50 or older) to a solo 401(k) plan, which is available to anyone with self-employment or freelance income. Your contributions can’t exceed your self-employment income for the year. You have until December 31 to make the employee share of your contribution and until April 15, 2022, to contribute as an employer.
Alternatively, you could contribute to a SEP IRA, which allows individuals to put away up to 20% of net self-employment earnings, with a $58,000 maximum. The deadline to both establish and fund a SEP IRA for the 2021 tax year is April 15, 2022.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Usually, withdrawing money from a traditional IRA before age 59½ results in a 10% penalty (the penalty also applies if you withdraw earnings early from a Roth IRA, but contributions can be withdrawn anytime without repercussions). The 2020 Coronavirus Aid, Relief and Economic Security (CARES) Act, however, permitted penalty-free withdrawals of up to $100,000 from an IRA or 401(k) in 2020 regardless of your age. You owe no federal income tax on the withdrawal if you put the money back into your account within three years of the date you received the distribution. (You may file an amended tax return to reclaim any tax you’ve already paid.) Consider repaying at least a chunk of the withdrawal amount this year. Or you can spread income tax on the distribution evenly over three years. If you took advantage of this provision, make sure that you account for the portion of tax you owe for 2021.
Consider a Roth Conversion
Especially if you think that your income tax rate will go up next year, you may want to convert your traditional IRA to a Roth IRA now. You’ll pay tax on the deductible traditional IRA contributions that you convert, but all withdrawals from the Roth are tax-free once you reach age 59½ and have owned the account for at least five years. Plus, you don’t have to take required minimum distributions from a Roth. For more on Roth conversions, see Kiplinger's Guide to Roth Conversions.
Don’t Forget to Take RMDs
Thanks to pandemic-related relief measures, retirees didn’t have to make their 2020 annual required minimum distributions from 401(k)s and traditional IRAs. But you’re back on the hook for 2021. If you were born on or after July 1, 1949, RMDs start at age 72, and you have until April 1 of the year after you turn 72 to take your first RMD; after that, yearly withdrawals are due by December 31. (Those born before July 1, 1949, had to take their first RMD at age 70½.) How much will you need to take out? Try our RMD calculator.
Transfer IRA Money to Charity
If you’re 70½ or older, you can direct up to $100,000 each year from your IRA to an eligible charity through a qualified charitable distribution (QCD). The amount you transfer is excluded from your taxable income, and it counts toward all or part of your RMD for the year. For a QCD to be eligible as an RMD, you must make the QCD by your RMD deadline, which is usually December 31.
Note that changes in the law now allow those 70½ or older who have earned income to contribute to a traditional IRA. If you make tax-deductible contributions to an IRA at age 70½ or later, the tax-free amount of a subsequent QCD is reduced by the amount of the contributions.
-
Here's How To Get Organized And Work For YourselfWhether you’re looking for a side gig or planning to start your own business, it has never been easier to strike out on your own. Here is our guide to navigating working for yourself.
-
How to Manage Risk With Diversification"Don't put all your eggs in one basket" means different things to different investors. Here's how to manage your risk with portfolio diversification.
-
457 Plan Contribution Limits for 2025Retirement plans There are higher 457 plan contribution limits for state and local government workers in 2025 than in 2024.
-
Is It Too Late to Do a Roth Conversion if You're Retired?The short answer is: Not at all. Roth conversions can be great tax-saving strategies … for the right people. Are you a good candidate?
-
Five December 31 Tax Deadlines for RetireesThe end of the year will be here before you know it, so it might be a good idea to start thinking soon about what you need to do for taxes before it arrives.
-
What Does Medicare Not Cover? Seven Things You Should KnowHealthy Living on a Budget Medicare Part A and Part B leave gaps in your healthcare coverage. But Medicare Advantage has problems, too.
-
13 Smart Estate Planning Movesretirement Follow this estate planning checklist for you (and your heirs) to hold on to more of your hard-earned money.
-
Medicare Basics: 11 Things You Need to KnowMedicare There's Medicare Part A, Part B, Part D, Medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare — and much more.
-
The Seven Worst Assets to Leave Your Kids or Grandkidsinheritance Leaving these assets to your loved ones may be more trouble than it’s worth. Here's how to avoid adding to their grief after you're gone.
-
Tax Tips for Transferring Excess 529 Plan Funds to Roth IRAs: The Tax LetterThe Tax Letter 529 plans can help blunt the cost of paying for college. But if you want to use leftover funds there are some tax tips to bear in mind.
