A workplace 401(k) plan can help you save a substantial amount of money for your retirement. But how much, exactly?
In this article, I’ll explain the 401(k) contribution limits for 2021, whether you’re contributing to a Roth or a traditional 401(k).
Table of Contents
- What Are the Max 401(k) Contribution Limits for 2021?
- 401(k) Contribution Limits: Employer Match
- 401(k) Catch-Up Contributions in 2021
- Contributions in Excess of the IRS Limits
- 401(k) vs. IRA Contribution Limits: Are They Related?
- 401(k) Contribution Limits for Highly Paid Employees
What Are the Max 401(k) Contribution Limits for 2021?
|Defined Contribution Plan Limits||2021|
|Maximum employee contributions (under age 50)||$19,500|
|Employee catch-up contributions (age 50+)||$6,500|
|Contribution limit, all sources (under age 50)||$58,000*|
|Contribution limit, all sources (age 50+)||$64,500*|
*Or 100% of your annual compensation if that’s a lower number.
If you’re younger than 50 years old, your maximum deductible employee contribution to your 401(k) plan is $19,500 in 2021.
You’re also eligible to stock your 401(k) with an additional $6,500 in catch-up contributions if you turn 50 sometime in 2021.
Keep in mind that the IRS usually updates these limits in October or November each year. The limits increase over time to keep pace with inflation.
Also, according to the IRS, you or your employer can contribute to the previous year’s 401(k) through Tax Day the following year.
Things To Know About the 401(k) Contribution Limits
- Contribution limits are cumulative across all plans. If your 401(k) contribution limit for 2021 from the chart above is $19,500, you can’t contribute more than that by splitting your contributions between 401(k) plans at multiple companies or between a Roth and a traditional 401(k).
- Hitting your maximum contribution prior to the end of the calendar year can mean losing out on the company match, which tends to be tied to per-paycheck deferrals. So if you reach your contribution limit, your employer may stop contributing (or “matching”) for the remainder of 2021.
- If you make less than $19,500 this year, the most you can contribute to your 401(k) plan is 100% of your salary.
- The 401(k) contribution limits for 2021 apply to 403(b) plans, most 457 plans and Thrift Savings Plans. SIMPLE and SEP plans feature their own contribution limits.
- Fidelity Investments said that in 2019, the average employee contributed 8.8% of their pay to their 401(k), up nearly 1% from a decade earlier.
- Some employers allow you to make post-tax, non-Roth contributions. It’s possible to convert those contributions into a Roth 401(k) or a Roth IRA. The IRS will tax only your earnings, not your original contributions, if you make such a conversion.
401(k) Contribution Limits: Employer Match
The beauty of a 401(k) is that your employer probably will match your contributions to some degree.
What does that mean? The simple version:
- You put money into your workplace retirement account.
- Your company puts money into your retirement account as well.
The money your employer puts into your account doesn’t come out of your salary. It’s essentially free money that you can get only if you contribute to your 401(k).
The only downside is that you can’t take money out of your 401(k) until you’re 59½ — unless you want to pay a 10% early withdrawal penalty to the IRS.
Here are a few other things you should know about a 401(k) employer match:
- An employer match doesn’t count toward your $19,500 or $26,000 contribution limit.
- Some employees share profits with employees via 401(k) contributions. Employees don’t have to contribute anything to get these contributions.
- Many companies now offer a 401(k) match. (It’s closer to a guarantee at larger companies.) According to Vanguard, as of 2019, the average 401(k) match was 4.3% of an employee’s salary.
401(k) Catch-Up Contributions in 2021
You can contribute to a company 401(k) plan only if you’re currently working for that company. Once you leave that job, you can no longer contribute additional money to that 401(k) account.
By the same rule, you aren’t allowed to continue contributing to your 401(k) in retirement.
The good news is that as you get closer to retirement age, the IRS lets you ramp up your contributions. If you’re at least 50 years old (and still working), you can contribute an additional $6,500 to your 401(k) plan in 2021.
If you turn 50 at any time during 2021, including New Year’s Eve (Dec. 31), you’re eligible to make a total of $26,000 in deductible contributions.
Contributions in Excess of IRS Limits
Hopefully you don’t exceed the 401(k) contribution limits for 2021. Your company should help ensure you don’t put in more money than you’re allowed.
However, if you hold more than one job, or if you switch jobs during the year, your company’s guardrails may not prevent this. So it’s good to know the rules.
The IRS won’t descend upon your house like a SWAT team if you go over of the limits. But there is a process to follow if this happens. It’s a headache, and you may need to pay additional taxes. So avoid it if you can.
401(k) vs. IRA Contribution Limits: Are They Related?
It’s possible to contribute to a 401(k) and an IRA.
However, Clark suggests that if you have the means to do so, max out your 401(k) contributions before you start contributing to an IRA.
Related: IRA vs. 401(k): Which Is Better?
Your 401(k) contributions can impact your IRA contributions, especially if you make a certain amount of income.
Here are a few more things to know on that subject:
- If you don’t have a retirement plan at work, you can deduct every dollar you contribute to a traditional IRA when you do your taxes. If you’re married, that remains true if neither of you have a retirement plan at work.
- You may or may not be able to deduct your traditional IRA contributions if you or your spouse have a retirement plan at work. It depends on your modified adjusted gross income (MAGI).
- You can’t contribute to an IRA unless you’ve earned income. But if only one spouse works, he or she can contribute to the IRA of the other spouse.
- IRS rules prevent you from contributing to a Roth IRA if your MAGI exceeds a certain amount.
401(k) Contribution Limits For Highly Paid Employees
Roth IRAs notoriously restrict or disallow direct contributions if you exceed maximum income limits.
You may have read something like this in an article discussing those income limits: Fortunately, if you don’t qualify to contribute to a Roth IRA, you can always contribute to your 401(k) at work.
That’s true … mostly. However, there are some incredibly confusing exceptions.
The government requires companies that offer 401(k) plans undergo what’s called “non-discrimination testing” as well as other similar tests. These tests determine whether people at the top of the company are contributing a disproportionate amount of their salaries to their retirement plans compared to everyone else.
The IRS doesn’t want 401(k) plans to benefit only business owners and highly-compensated employees (HCEs).
I won’t get too deep into the details of those tests in this article. Just know that you may be limited in terms of the amount you can contribute to the company 401(k) in 2021 if you:
- Own at least 5% of the company at any point in the year regardless of salary.
- Own at least 1% of the company at any point in the year and you make a certain salary.
- Make at least $130,000 and you’re in the top 20% in terms of income at your company.
- Are a company officer (CEO, CFO, etc.) and make more than $185,000.
You may also hear about “safe harbor” 401(k) plans. Safe harbors make it possible for a company to bypass the tests I mentioned.
A safe harbor 401(k) plan is a compromise. The company has to offer a minimal 401(k) match each year.
One of the options for “safe harbor” plans is to provide non-elective company contributions. That means the company gives every employee some retirement money regardless of whether the employees contribute.
It’s easy to drown your brain in a sea of 401(k) rules and regulations. The biggest things to know are:
1. How much can you contribute to your 401(k) this year? Check the table near the top of this article for a reminder.
2. If you’re unable to approach your 401(k) contribution limit in 2021, how much do you need to contribute to get a full company match? If at all possible, do what you can to get every penny that your company offers through a match. It’s basically free money.