401(k) Contribution Limit Increases for 2021
posted by Fisher 401(k) November 11, 2020 Updated
If you offer a 401(k) plan at your small business, the contribution limits for employees who participate in 401(k), 403(b), and other select government savings plans is $19,500.
For 2021, the IRS and DOL made a few other changes that are helpful for you or your employees to know:
• The annual overall limit on contributions to a participant’s account has increased to $58,000 for 2021 (or capped at 100% of the participant’s salary if they are paid less than $58,000).
• For participants over the age of 50, catch-up contributions remain at $6,500, in addition to the $19,500 limit.
• The annual limit for IRA contributions remains at 2020's limit of $6,000.
• The qualifying income cap for the Saver’s Tax Credit for workers has increased to $66,000 for married couples filing jointly, $49,500 for heads of household, and $33,000 for single filers.
Here are some common employee FAQs regarding retirement plan contribution limits:
How much am I allowed to save in my 401(k)?
Each year, the Internal Revenue Services (IRS) releases updated contribution limits for retirement plans. Some years, contribution limits will increase, but not always. As of 2021, you are allowed to contribute up to $19,500 in your 401(k). Additionally, employees over 50 are allowed an extra $6,500 in catch-up contributions in order to save more for retirement.
What if I want to save more than the 401(k) contribution limits?
There are a few options if you want to save beyond the $19,500 limit. You can choose to set up your own Individual Retirement Account (IRA), which will allow you to save up to $6,000 per year (or $7,000 with catch-up contributions) and grow that money through investments just like a 401(k). There are also Roth IRAs, which require you to pay taxes prior to saving into your account, but make withdrawals tax-free later in retirement. Note that there are some income limits for the tax benefits of IRAs that means some higher-paid individuals won't get those tax perks. Finally, if you aren't worried about paying taxes on your savings, you can also set up a brokerage account to invest and grow money for retirement.
2021 401(k) Contribution Limits
|Elective Deferral Limit*||$19,500||$19,500|
|Annual Contribution Limit||$58,000||$57,000|
|Annual Compensation Limit||$290,000||$285,000|
How Employees Can Max 401(k) Contribution Limits
When your employees contribute as much as possible to their 401(k) accounts, they are more likely to get on track for a dignified retirement. And while not every employee will be able to meet the maximum contribution limit, as little as $25 more in savings per paycheck can add up over time. Here are some ways your employees can get inspired to save more or even max out their 401(k) contribution limits:
Employees Use Retirement Calculators to Project 401(k) Contribution Growth
One easy step to get motivated to save even a little more for retirement is to use a retirement calculator. These tools allow employees to crunch a few basic numbers and learn how much their current or hypothetical savings will grow before retirement. This makes it easier for employees to visualize their retirement income, and how much of an impact their choices today can have. The definition of a max 401(k) contribution may be different for everyone, but a retirement calculator shows in dollars and cents how pushing the limit and saving more makes a difference over time.
Employees Value Help Reaching 401(k) Contribution Limits
We believe one-on-one support from a 401(k) adviser, whether on the phone or in person, helps employees stay committed to their 401(k) contribution. We find this is especially true when it comes to the challenge of saving long-term. Our team of 401(k) specialists speaks one-on-one with employees to help them think through their savings rate, even to adjust it over time. By helping those employees set new goals and adapt 401(k) investment strategies to each phase of life, employees stay on track for retirement even as “life happens” along the way.
Employer Match Encourages Employees to Save
Another powerful tool to increase savings among your employees is adding an employer match to your 401(k). By offering to match employees’ contributions up to a percentage of their salary, or even up to maximum 401(k) contribution limits, you can provide them with a real incentive to save as much as possible. This is a win-win for all employees and can help them get set up for a dignified retirement.
Maximize Personal 401(k) Contributions
One of the best ways for a business owner or other highly compensated employee (HCE) to get on track themselves for retirement is to maximize personal contributions to a 401(k) account. Not only will this greatly increase the amount of money you have invested and growing for retirement, it will also reduce your tax burden today. Working with a professional one-on-one will help make the most of these opportunities.
*Catch-up provision of $6,500 per year available to all employees age 50 and older during the calendar year.
**A highly compensated employee (HCE) is an employee who earned more than $130,000 in the preceding year, as well as any 5% owner.