Responsible Retirement: What's the Maximum Amount You Can Contribute to a 401(k)?

By Tina RuhlowLast Updated Mar 4, 2021 1:51:06 AM ET
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Using a 401(k) plan to save for retirement is one of the more effective ways to reach your financial goals later in life. If your employer offers one, it’s important to take advantage of this automatic savings opportunity. In some cases, your employer may even match a portion of every dollar you put in, contributing what’s essentially "free money" to help build up your savings and lead your desired lifestyle once you leave the workforce.

There are limits, however, to the amount of your pay you can contribute to your 401(k) each year, and by November every year, the Internal Revenue Service (IRS) releases the maximum amount you can contribute for the following year. To help you navigate the IRS limits for 2021, we’ve rounded up the essentials you need to know about responsible retirement and the ways you can maximize your 401(k) and other retirement accounts this year.

The Basics of Funding Your 401(k)

As an employee, you’re able to contribute $19,500 to your 401(k) plan for 2021. This was the same contribution limit as 2020, and it includes elective employee deferrals and contributions made to a Roth account included in your 401(k) plan. The same limit applies to special Roth 401(k) plans. For SIMPLE 401(k) plans, the limit is $13,500.

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It’s important to note that even if you have more than one 401(k) account, you can’t exceed the $19,500 limit. This doesn’t apply to individual retirement accounts (IRA), however. If you have other types of retirement savings, such as an IRA, they won’t affect the contribution limit to your 401(k).

What Contribution Makes Sense for You?

The right amount to contribute will look different for everyone, and you need to consider your own financial situation. If you don't have much or any money saved for emergencies, for example, building up an emergency fund to pay for unexpected life expenses might be a more important short-term goal to focus on. The same goes for paying off debt. While you focus on these financial goals, you can still contribute to your 401(k), but it may be best to do so at a lower rate instead of paying an amount that might max out your contributions for the year.

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Once you've reduced your debt and saved a comfortable amount for a rainy day, you can then bump up your retirement savings to maximize your benefit contributions for as long as possible before you retire. Just remember that it’s never too early to include retirement in your long-term financial plans. The sooner you start making 401(k) contributions, the more you'll be able to take advantage of this great savings opportunity.

Making Catch-Up Contributions

Catch-up contributions made to your retirement savings accounts allow you to save more money as you near retirement. They’re an incentive to help older Americans maximize their working years later in life. Essentially, catch-up contributions are extra amounts of money — above the typical limit — you’re allowed to add to your 401(k) once you reach a certain age.

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If you’re over the age of 50, you’re eligible to make the catch-up contribution of $6,500 in 2021. For employees over 50, you and your employer can max out at $64,500 total with catch-up contributions. That includes the $19,500 contribution limit, the $6,500 catch-up contribution and the employer contribution limit.

If you haven’t been maximizing your 401(k) contributions and are over 50, it’s time to look into this option. Take advantage of the increased limit and max out your 401(k) to get the most savings possible before you retire.

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It’s important to note that catch-up contribution limits change at the start of the calendar year in which you turn 50. Regardless of the month your birthday is in, you can change your contributions for the year.

How Do Employer Contributions Factor In?

One of the best things about using a 401(k) for retirement is that many employers match your contributions. Imagine that your employer matches 50 cents for every dollar an employee contributes. That means your employer is giving you 50 cents free for each dollar you contribute.

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Up to a certain limit, employers can also choose to make contributions no matter what you contribute yourself. That means that even if you’re not maxing out your 401(k), an employer can give you a holiday gift of $1,000 into your 401(k) regardless of what you’re putting in.

The total contribution limit is $58,000 for both employers and employees, or 100% of their total pay. Remember that, if you’re over 50, your base contribution limit increases to $64,500. That’s $58,000 plus $6,500 in catch-up contributions.

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Highly compensated employees — those who earn more than $130,000 in compensation or own more than 5% of the company regardless of compensation — face stricter contribution limits to their 401(k). This is to prevent wealthy employees from unfairly benefiting from tax benefits associated with 401(k) plans. To combat this, the IRS uses a test called the actual deferral percentage, or ADP. This helps to ensure every employee is participating proportionately to their company's 401(k) plan.

2020 vs. 2021 Changes

At the end of every year, it’s important to look at your contributions. If you see that you’ve contributed more than the limit in a given year, you’ll need to notify the IRS by March 1 that you’ve added too much. You’ll be given the excess payments by April 15.

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Here’s a breakdown of contribution limits from 2020 compared to 2021:

  • Maximum employee elective deferral = $19,500, no change from 2020
  • Employee catch-up contribution limit = $6,500, no change from 2020
  • Maximum contribution limit from all sources = $58,000, +$1,000 from 2020
  • Maximum contribution limit for catch-up employees = $64,500, +$1,000 from 2020
  • Compensation limit used to calculate contributions = $290,000, +$5,000 from 2020
  • Highly compensated employees’ threshold for nondiscrimination testing = $130,000, no change from 2020

Why Max Out Your 401(k)?

If you’re financially able to do so, maximizing your 401(k) is a great way to save for retirement. If you’re not comfortable stashing away that much each month, consider at least maxing out your employer’s contribution. You want to take advantage of the money your employer is able to put into this retirement savings tool because this is like free money your employer gives to you.

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According to a recent study from The New School’s Schwartz Center for Economic Policy Analysis, 35% of American workers ages 55 to 64 have no money saved for retirement in a 401(k) plan or pension plan. For workers who do have a 401(k) plan, the median balance is $92,000. That only leaves $300 a month worth of income in retirement. Think about what you'd like to live on when you retire.

If you aren’t contributing at all yet, it’s never too late to start. Even 1% of your income adds up over the years. As you age and become more financially stable, you can increase your contributions to take advantage of these retirement savings accounts.

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