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401(k) Contribution Limits 2021

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Key takeaways

  • The 2021 limit on how much you can contribute to your 401(k) is $19,500.
  • If you’re 50 and over, you can contribute an extra $6,500 — this is called a 401(k) catch-up, which helps ramp up your savings as you get closer to retirement.
  • Some employers can “match” your contributions – those matches don’t count towards your personal contribution limit.
  • Financial advisors typically suggest you contribute around 10% of your paycheck towards a 401(k), but the right number will depend on your personal circumstances.

401(k) accounts have become the primary way Americans save for retirement because of their tax advantages and potential employer matches – popularly referred to as “free money.” Like many good things, though, there’s a catch: the IRS puts a limit on how much you can contribute each year. That’s because your 401(k) contributions are generally made pre-tax, which means you only pay taxes when you withdraw your funds.

Let’s take a look at 401(k) contribution limits in 2021.

The annual contribution limit varies depending on your age. If you are under the age of 50, your 2021 contribution limit is $19,500. If you fall into the 50 or older group, you can contribute an extra $6,500 annually into your 401(k). This is called a catch-up contribution. 401(k) catch-up contributions can help increase your retirement savings as you get closer to retiring.

The 401(k) contribution limit can change annually, so here’s a summary of 2021 limits:

2021 contribution limits by age
Under age 50 $19,500
Age 50 and over $19,500 + $6,500 in catch-up contributions = $26,000

Employers can choose to contribute to your 401(k). This can be either a non-matching or matching contribution. If it’s non-matching, that means your employer will contribute regardless of whether you do. If it’s a matching contribution, the employer typically contributes an amount equal to a certain portion of your contributions. In 2020, Vanguard estimated that 86% of plans offered some employer matching. A typical employer match can be around 3-4% of your salary, as long as you contribute that much.

Let’s look at an example where an employer matches up to 3% of your salary. If you make $100,000 annually and you contribute 3% of your income – or $3,000 – your employer would contribute another 3% to your 401(k). So, your $3,000 contribution effectively becomes $6,000 including the employer match. That’s why people often call matches “free money.”

Importantly, employer contributions do not count towards your individual 401(k) contribution limits, but there is a separate limit for the combined total of both your individual contributions and employer contributions. Here’s a summary of the two limits:

Individual contribution limit Total contribution limit (including employer match)
Under age 50 $19,500 The lesser of 100% of an employee’s compensation or $58,000
Age 50 and over $26,000 $64,500

First of all, don’t panic — this happens and can be corrected. If you go past the 401(k) contribution limit, notify your employer about the excess contributions you made to your 401(k) before tax day of the following year. They can help have that extra amount distributed back to you. For example, if you exceeded the contribution limit for 2020, you’ll need to take back the excess contributions by April 15, 2021.

A word of caution: try to fix this mistake before you pay your annual taxes. If you realize you’ve over-contributed after you pay your taxes, you’ll pay an extra 6% tax on the excess contributions in your 401(k). While these consequences are serious, they can easily be avoided if you keep in mind the yearly contribution limits.

A rollover occurs when you transfer the money in an old 401(k) account to another retirement account, like a 401(k) or an IRA. While most of the rollovers that occur are from a 401(k) into an IRA, some of them involve moving money from one 401(k) to another.

Here’s some good news: 401(k) rollovers don’t contribute to your yearly 401(k) contribution limit, so feel free to keep contributing as usual.

Now that you know your 2021 401(k) contribution limit, another common question is: “how much should I contribute to my 401(k)?” Many financial advisors suggest you contribute 10% of your annual salary, though the average person contributes about 7%. The right amount will depend on your budget and retirement goals.

Here are a few factors to consider when choosing your contribution amount:

  • Does your employer match any of your contributions? If so, try to contribute at least that much to take advantage of the “free money.”
  • What are your usual monthly budget needs? You’ll want to make sure your contribution leaves enough money for all your expenses.
  • Do you have any significant payments to make in the near future – for example, a down payment on a house? If so, make sure you are putting enough money aside for those since your 401(k) funds may not be available to withdraw without taxes and penalties.
  • Have you built up an emergency fund for unexpected expenses like medical bills or temporary unemployment? If not, consider diverting some of your funds there instead of a 401(k).

While it’s up to you to decide the right contribution amount, remember that it’s usually in your best interest to contribute as much as you can. The more you contribute now, the more money you’ll have when you retire.

Your 401(k) can be a powerful retirement savings tool. If you consistently make contributions during your working years, you’ll put yourself in a strong financial position for retirement. While you’re planning your 401(k) strategy, just remember these rules and guidelines around your contributions to keep yourself on track.

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