All retirement savings plans have contribution limits. Although the contribution limits for 401(k) plans in 2021 were mostly unchanged from 2020, there were a few important updates to total contribution limits.
What is a 401(k) contribution plan?
A 401(k) is a tax-deferred retirement savings plan typically offered through an employer. An employee designates a certain percentage of their salary to flow directly into that account before any taxes are paid on that money. This is called elective deferral: The employee elects to defer part of their salary to their 401(k), before taxes. Employees may also have the option to make voluntary after-tax contributions to their 401(k), though they don’t often choose to, as these are not tax-advantaged.
Some employers also choose to contribute to employee 401(k) plans. The employer may match employee contributions dollar-for-dollar up to a certain amount or percentage of their salary, or contribute 50 cents on top of every dollar they contribute. Employers may also make other types of contributions to employee plans, like profit-sharing.
Basic 401(k) contribution limits
The annual elective 2021 deferral limit for a 401(k) plan is $19,500, but employees 50 and older can make an annual catch-up contribution of $6,500, bringing their total limit to $26,000. If an employer chooses to match some or all of employee contributions, those employer contributions do not count toward the elective deferral limit. They do count toward the overall contribution limit.
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Traditional 401(k) vs. Roth 401(k) contribution limits
Again, traditional 401(k)s are employer-sponsored retirement plans. Employees make their contributions with pretax dollars, and the money isn’t taxed until it’s withdrawn in retirement. With Roth 401(k)s, contributions are made with after-tax dollars, so investors don’t have to pay taxes on their withdrawals.
The 2021 contribution limits for traditional 401(k)s are:
- For employees: $19,500, plus a $6,500 catch-up contribution for those 50 and older.
- For total employer and employee contributions: $58,000, plus a catch-up contribution of $6,500 for those 50 and older.
The 2021 contribution limits for Roth 401(k)s are:
- For employees: $19,500, plus a catch-up contribution of $6,500 for those 50 and older.
- For employers: $58,000, plus a catch-up contribution of $6,500 for those 50 and older.
2020 vs. 2021 contribution limits for traditional and Roth 401(k)s
Here are some key ways annual contribution limits changed in 2021.
- Increased total contribution limits. In 2021, the total amount employers and plan participants can contribute to a 401(k) is $58,000, or $64,500 with a catch-up contribution. In 2020, that limit was lower—$57,000, or $63,500 with a catch-up contribution.
- Increased thresholds for high-earning employees. Highly compensated employees are defined by the IRS as those earning $130,000 or more in 2020 or 2021, or those who owned more than 5% of a company at any time during that period. In 2020, the employee compensation limit for calculating contributions was $285,000. In 2021, that number rose to $290,000.
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