This year, the IRS announced that the maximum employee 401(k) contribution limit would remain unchanged for 2021, remaining at $19,500, the level set for the 2020 tax season.
Additionally, there will be no change to the maximum amount permitted for catch-up payments. These are the additional contributions that individuals over 50 can make to a 401(k) plan.
That figure will remain at $6,500 in 2021. This equates to a total payment of $26,000 for plan participants aged 50 and older.
The 401k Contribution Limits 2021 are revised annually in October.
Contribution limitations increase more during years of higher inflation and less during years of low inflation, as has occurred in recent years. At times, there has even been talking of reducing contribution limits in response to a negative inflation rate.
Fortunately, the scenario has never occurred, and the limitations have either been slightly increased or remained unchanged.
What you need to know about 401k limits 2021:
From 2009 to 2020, the graphic below illustrates the maximum Contribution to a base 401(k), the catch-up contribution for employees age 50 and older, and the maximum allocation from all tax-sheltered retirement plans.
As you can see, the rate of growth during the last eleven years has been typically slow. Since 2009, the maximum Contribution has increased by only $3,000, while the catch-up contribution has increased even less.
Additionally, as you can see, contribution limitations had stagnated in the past, such as from 2009 to 2011, when they remained unchanged at $16,500 for three consecutive years. Even more glaring is the absence of any growth in the catch-up payment for a full six years, from 2009 to 2014, when the sum stayed unchanged at $5,500.
Between 2009 and 2021, the ceiling climbed to $58,000 from $49,000. That’s a $9,000 rise over ten years, or more than 2{e1706a52c3b3138427a8e72931d9d59b6d08ac610477d60aad46d317c02b8d31} every year.
Maximum 401k contribution 2021 in a given year
Allotment Maximum $59,500$6,500$19,500$6,500$58,000$19,500$6,500$58,000$19,500 2019$19,000$6,000$56,000 202019,500$6,500$57,000 2019$19,000$6,000$56,000 $6,000$55,000$18,500$6,000$6,000$6,000$6,000$6,000$6,000$6,000$6,000$6,000 $18,000$6,000$54,000$18,000$6,000$54,000$18,000$6,000$54,000$1 $18,000$6,000$53,000$18,000$6,000$53,000$18,000$6,000$53,000$1 $18,000$5,500$53,000$18,000$5,500$53,000$18,000$5,500$53,000$ $17,500$5,500$52,000$17,500$5,500$52,000$17,500$5,500$5 $17,500$5,500$51,000$17,500$5,500$51,000$51,000$51,000$51,000 $17,000$5,500$50,000$17,000$5,500$50,000$17,000$5,500$50,000$1 $16,500$5,500$49,000 in 2011 $16,500$5,500$49,000$16,500$5,500$49,000$16,500$5,500$49,000 $16,500$5,500$49,000$16,500$5,500$49,000$16,500$5,500$49,000
401k 2021 limits
The maximum annual allocation is increased by the permitted catch-up contribution each year (which applies to workers 50 and older). For example, the maximum allocation for 2021 is $63,500. This is the maximum $57,000 allocation, plus the $6,500 catch-up contribution.
Contributions to Roth 401(k) Plans are also subject to the contribution limits.
Roth 401(k) contribution limits are identical to those for standard 401(k) contributions. This means that you can contribute up to $19,500 per year to either a traditional or Roth 401(k) plan.
More likely, you’ll want to donate to both, in which case you’ll need to decide how much of your $19,500 contribution maximum to devote to each (k).
Not a coincidence, the 401(k) contribution limitations are nearly identical to those for the 403(b) and Thrift Savings Plans (TSP).
Additionally, any employer contributions to the plans that the employer matches are not included in the employee contribution limits indicated above.
Your employer may match up to $19,500 of your monthly contributions or up to the combined $26,000 limit if you are age 50 or older. It is always prudent to determine whether a Roth 401k or Roth IRA is the better option for you.
How Much Should You Contribute Now That Contribution Limits Have Been Increased?
The IRS makes annual determinations regarding whether or not to increase donation limitations. Occasionally, increases in the Consumer Price Index (CPI) were highly tiny, on the order of 2{e1706a52c3b3138427a8e72931d9d59b6d08ac610477d60aad46d317c02b8d31} each year. Therefore, Congress prefers to raise donations in $500 increments, as they did this year.
You may be thinking if you should boost your contributions by $500 in 2020. My answer is an unequivocal yes.
If you divide that sum into monthly contributions, you’ll make only somewhat lower amounts over time, which will benefit you. Continuing to contribute at this level to your 401(k) is an excellent approach.
Contribute to Your 401(k) with These Tips
For most workers, the stagnant or level 401(k) contribution limits during the last three years are not a significant issue. The real issue is a lack of staff engagement. A sizable majority of employees do not engage in a 401(k) plan, even if their employer offers one.
What percentage of American workers contribute to their 401(k) plans? Naturally, each age group has distinct characteristics. According to Fidelity, Americans in their 30s had an average 401(k) balance of $38,400, with an average contribution rate of 8{e1706a52c3b3138427a8e72931d9d59b6d08ac610477d60aad46d317c02b8d31} of income. That figure was $93,400 for Americans in their forties, again with an average contribution rate of 8{e1706a52c3b3138427a8e72931d9d59b6d08ac610477d60aad46d317c02b8d31}.
The same data indicates that workers in their sixties put 11{e1706a52c3b3138427a8e72931d9d59b6d08ac610477d60aad46d317c02b8d31} of their salary to a 401(k) (k).
Contribution limits have grown by only $500 over the last five years, but $19,500 still represents a substantial amount of tax-deferred savings. So make every effort to contribute the highest amount feasible, especially as you near retirement.
Utilize the Maximum Allocation
The column labeled Maximum Allocation contains the highest value for each year on the chart above. That is the maximum amount you can contribute to any tax-advantaged retirement plan. It is a more significant issue than the majority of people understand.
Despite rising 401(k) contribution limits, the ordinary worker falls short of maximizing their maximum contributions to all types of retirement plans. The maximum allotment for 2021 is a very generous $57,000 for all plans, or $63,500 for workers 50 and older.
That is the maximum amount you can donate outside of your 401(k) plan. If your income falls within limits for either plan, you may be eligible to make tax-deductible contributions to a traditional IRA or nondeductible contributions to a Roth IRA.
Contribute to an Individual Retirement Account (IRA)
Even if your income exceeds the tax-deductible contribution threshold – in addition to being covered by an employer plan – you can contribute to a conventional IRA on a nondeductible basis regardless of your income.
While this would not result in a tax benefit, it will enable you to contribute more money to a tax-deferred retirement plan where your investment returns will accumulate tax-deferred.
Contributing $6,000 to an IRA in addition to $19,500 to a 401(k) plan increases your annual contribution to $25,500 (or $32,000 if you are 50 or older).
However, in addition to IRAs, other types of tax-advantaged retirement plans are available to self-employed individuals, including SEP and SIMPLE IRAs. If you run a side business, you can continue to contribute to these retirement plans.
They will enable you to make additional contributions to a tax-advantaged retirement plan. You can contribute up to $57,000 in total, which leaves plenty of flexibility for additional contributions.
Utilize Your 401k to the Fullest with Blooom
Blooom is an asset management program that steps in where your employer frequently falls short when it comes to 401(k) planning.
For example, Blooom can aid with the following critical tasks:
Avoiding: unwelcomed hidden charges
Getting around those annoying account minimums
Calculating precise stock-to-bond ratios
Identifying: whether your existing plan satisfies your long-term retirement objectives
Transferring complete partnership responsibility to the employee rather than the employer
The free 401(k) analysis tool makes management recommendations that you must pursue on your own; but, by establishing a premium account, Blooom gains access to your retirement account and makes essential modifications on your behalf.
However, because Blooom is designed exclusively to administer employer-sponsored retirement plans, investors with other account types or who need comprehensive assistance should seek more tailored choices.
GET STARTED WITH BLOOM What Contribution Limits Can We Expect in the Future
The good news is that we have been experiencing persistently low inflation for an extended period. That’s good news for the cost of living, even if it means that maximum 401(k) contribution limits have remained frozen.
Given that this appears to be a long-term trend, we should presumably anticipate several more years of either modest or non-existent contribution limit hikes.
However, this provides an even stronger case for maximizing your contributions within the current restrictions, as well as examining the possibilities of contributing to other retirement plans, such as IRAs or the various self-employed plans.
We must work within our financial constraints and acknowledge that they are more than adequate to reach our retirement goals. Moreover, these constraints will enable us to achieve precisely that, even if they do not significantly grow in the future.
Increased Taxes: How Will They Affect 401(k) Contributions?
Are you concerned about the effects of a future tax increase on your 401(k) contribution? According to some experts, various tax increases across the board are expected due to COVID-19 spending. As a result, individuals may bear the brunt of tax increases in increased property taxes, income taxes, or even company taxes.
Expert analysis on the 2017 Tax Cuts and Jobs Act also highlights that federal tax increases will occur every two years beginning in 2021, potentially affecting those earning less than $75,000 per year.
Because tax increases may affect your monthly budget, it’s critical to assess your finances if these increases occur. Ascertain that you are saving enough each month to make the retirement contributions you desire.
