The IRS Increases 2021 Contribution Limits to SEP IRAs and Solo 401(k)s for Business Owners HSA limits increase as well, while Traditional and Roth IRA limits remain unchanged.

By Mat Sorensen

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Cn0ra | Getty Images

The IRS increased 2021 contribution limits for self-employed persons who contribute to a SEP IRA or Solo 401(k) from $57,000 to $58,000. For those 50 or older, there is also a $6,500 catch-up contribution amount allowing total contributions in 2021 of $64,500. The SEP IRA and the Solo 401(k) have become a popular savings tool for self-employed persons who don't have an employer 401(k) plan, as they allow them to contribute more than the annual $6,000 contribution that is allowed in a Traditional IRA or Roth IRA. Solo 401(k)s and SEP IRAs are also easier to administer than pension plans, and standard 401(k)s and have proven to be an optimal fit for self-employed persons who do not have full-time employees other than themselves, partners, and family.

The IRS did not change 2021 contribution limits on Traditional IRAs and Roth IRAs and those amounts remain at 2020 levels of $6,000 annually, with a $1,000 catch-up for those 50 or older. The 2021 income phaseout for Roth IRA contributions begins at $125,000 for singles and heads of household and starts to phase out at $198,000 for married couples filing jointly. If you phase out for standard Roth IRA contributions because you are high-income, you can contribute using the back-door Roth IRA method.

Related: SBA Approves Simple 1-Page PPP Forgiveness Application for Loans of $50,000 or Less

Employee contribution limits to 401(k)s were increased in 2020 to $19,500 and remain the same for 2021. HSA contribution limits for 2021 will go up from $3,550 individual to $3,600, and family contributions will increase from $7,100 to $7,200.

2021 Contribution Limits

IRS 2021 Retirement Contribution Limits

All of these accounts provide tax preferences and benefits over a typical savings account. The HSA, Traditional IRA, Solo 401(k) and SEP IRA all provide tax deductions when you contribute to them and the funds grow tax deferred. For Roth IRAs and Roth accounts in Solo 401(k)s, there is no tax deduction on your contributions, but the funds grow and come out tax-free at retirement. One of the most significant costs to growing wealth and assets for retirement is taxes. These accounts all provide tax advantages over typical savings and brokerage accounts with non-retirement account dollars.

Related: SEC Expands Accredited Investor Rule

If you are looking for tax deductions, tax deferred growth, or tax-free income, you should be using these accounts. Keep in mind there are qualifications and phase-out rules that apply, so make sure you are getting competent advice about which accounts should be utilized in your specific situation. And lastly, the power in using these accounts is in maximizing the investement returns. All these accounts can be self-directed and invested into assets you know best. When you contribute funds into these accounts, those funds can be invested to grow. You can then invest into public stock, ETFs and mutual funds, but also into real estate, private companies and funds (LPs and LLCs) and small businesses using self-directed account providers. Consider your investment options wisely, and seek out professional advice as needed to become educated and informed on how to best achieve your financial goals.

Mat Sorensen

Entrepreneur Leadership Network® VIP

CEO & Attorney at Directed IRA & Directed Trust Company

Mat Sorensen is an attorney, CEO, author, and podcast host. He is the CEO of Directed IRA & Directed Trust Company, a leading company in the self-directed IRA and 401k industry and a partner in the business and tax law firm of KKOS Lawyers. He is the author of The Self-Directed IRA Handbook.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Editor's Pick

Related Topics

Diversity

Prioritize DEI and Crush Your ROI Goals — How Inclusive and Authentic Marketing Drive Business Growth

There's one business hack that's winning, though it's often overlooked: Diversity, equity and inclusion is good for business — and just plain good.

Productivity

Jon Taffer's 10% Rule Is the Productivity Hack That Could Change Your Life

The "Bar Rescue" superhost is back with a new season and a new crop of hospitality businesses in desperate need of tough love.

Science & Technology

AI May Not Take Your Job, But Someone Using AI Likely Will — Here's Why.

Artificial intelligence is becoming ubiquitous across marketing and public relations agencies. These tools can increase productivity, but there are risks to consider.

Business News

Another Taylor Swift-Related Job Opportunity Just Opened Up — Here's How to Qualify

As the superstar embarks on the next leg of The Eras Tour, a UK-based museum is hiring a Taylor Swift advisor.

Starting a Business

This Black Founder Was Denied a Business Loan and Set Out to Prove the 'Gatekeepers' Wrong. He's Made More Than $500,000 So Far — But It's Just the Beginning.

Rob Gooljar, founder of IRIS blossom, started an Instagram account to share his love of floral arrangements — then the requests started rolling in.

Growing a Business

9 Hidden Reasons Your Customers Will Leave You

Understanding why customers are leaving your business takes attention, not assumptions. Read on for proven ways to catch issues early and keep more clients around for the long run.