How Will the New 2021 Tax Deadline and COVID Relief Bill Affect Your IRA Contributions?


Things are constantly changing these days – indoor dining is open! closed! open! — and that's true for government policy, too. There have been two recent developments in particular that affect the daily life and finances of the average American:

  1. The federal government passed multiple major relief bills and provided stimulus money to help people struggling due to the pandemic.
  2. The IRS has extended the federal tax filing deadline to May 17, 2021. 

Both of these things could affect how you handle your retirement contributions this year. Let's look at some ways that these policies might inspire you to do things a little differently. 

You have longer to make IRA contributions

You not only have until May 17 the file your taxes — you also have until that date to make contributions to your IRA that will apply to the 2020 tax year. The deadline for these contributions is usually April 15, the same day you typically have to file your taxes.

Some states are following suit and temporarily changing their tax rules to match. Make sure to check your state's rules before filing this year.

Speaking of contributions, the SECURE Act of 2019 — pre-Covid, but still a recent change to retirement rules — removed the age limit on making contributions to IRAs.

Wondering if you can make an extra contribution before the May 17 deadline? Check out the annual contribution limits for 2020:

  • IRAs: $6,000
  • 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan: $19,500.
  • SIMPLE retirement accounts: $13,500.

You have longer to pay tax owed on retirement plan distributions

If you took any early distributions from your IRA or workplace-based retirement plan in 2020, then you owe a 10% additional tax on that total. That is a bummer, but the good news is that you also have until May 17 to report and pay that 10% additional tax to the IRS. This is because this tax is part of your regular income tax filing, for which the deadline has been extended.

You might have your tax waived on retirement plan distributions

There's one exception to the previous rule: If the early distributions you took from your retirement account in 2020 were to cope with coronavirus-induced hardship, then you don't have to pay the 10% extra tax. The CARES Act of 2020, a pandemic relief bill put into law last March, includes a waiver of the tax for distributions up to $100,000 if the withdraws were pandemic-related.

Additionally, the CARES Act states that you can include your distribution in your taxable income over three years instead of all in the tax year 2020, which will lower your taxable income for 2020.

You don't have to pay tax if you didn't take RMDs in 2020

In addition to the relief above, the CARES Act also provided permission to retirement-age individuals to forego required minimum distributions (RMDs) in 2020. Under the usual rules, anyone over 72 with an individual retirement account (IRA) is required to withdraw a certain amount of funds from the account each year and pay tax on the money. That wasn't required in 2020, and those who took advantage of that change now don't have to pay any taxes on retirement income.  

Covid relief measures might provide extra cash to invest in your IRA

Many Americans have received stimulus checks over the last year, to the tune of hundreds of billions of dollars. A family of four might have been able to collect as much as $5,600 in stimulus payments from the third round of payments alone. Those who can afford to may have contributed this money to their IRAs.

The American Rescue Plan, the $1.9 trillion relief package that President Biden signed in March, provides various provisions to help people keep more of their money in these tough times. One group of beneficiaries is those who received unemployment compensation in 2020, up to $10,200 of which is now exempt from federal income tax. Unemployed taxpayers who don't need the tax rebate for rent or bills can consider putting some of it away for retirement.

What about saving for retirement in 2021?

The limits on retirement savings amounts for 2021 will remain the same as in 2020, but the allowable maximum income levels for making deductible contributions to IRAs will go up this year. There's no provision for tax relief on early distributions taken from retirement accounts in 2021, and those of retirement age are required to take RMDs again this year.

But, as ever, things could change. Keep your eye on the news for any more retirement-related changes coming out of Washington.

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