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401(k) contribution limits for 2021

401(k) contribution limits for 2021 are $19,500 and an extra $6,500 if you’re turning 50.

A 401(k) plan is a retirement savings account offering solid tax benefits like tax-deductible contributions. And some companies also invest in their employees’ 401(k) plans, making employer-matching contributions the closest thing to free money you may encounter. But, there are limits.

How much can you contribute to your 401(k) in 2021?

In 2021, employees can contribute up to $19,500 to their 401(k) plans. If you’re at least 50 years old, you can make an additional catch-up contribution of up to $6,500. The IRS designated catch-up contributions as a way to help those closest to retirement save more.

Every year, the IRS updates limits on 401(k) plans based on inflation. These limits tend to increase slightly year after year. But this year, the employee 401(k) contribution limits for 2021 remained unchanged from 2020. (When you’re deciding what to contribute, remember that there are penalties for pulling money out before you’re 59 ½.)

How much can your employer contribute to your 401(k) in 2021?

There is no specific maximum amount that an employer can contribute to its employees’ 401(k) plans in 2021. However, the total defined contribution maximum limit for 2021 is $58,000 or $64,500 if you’re 50 or older. That includes employer contributions.

So what exactly is a defined contribution (DC) plan? A DC plan is a type of retirement benefits plan in which employees set or define how much they want to contribute and it’s automatically deducted from their paychecks. Employers are allowed to make matching contributions. There are several DC plans.

  • 401(k) plans
  • 403(b) plans
  • Thrift savings plans (TSP)
  • 457 plan
  • 401(a) plan

So if you have more than one of these accounts, the total contribution limit for 2021 across all plans including employer matches is $58,000 or $64,500 if you’re at least 50 years old.

But there’s one above-all rule. The IRS states that total contributions from all sources can not exceed 100% of a participant’s compensation.

What are the contribution limits if you’re a highly compensated employee?

There’s no set contribution limit for highly compensated employees (HCE). However, a 401(k) plan must go through nondiscrimination testing to make sure HCEs aren’t disproportionately benefitting from the tax benefits of a 401(k) plan while leaving out non-HCEs. This may restrict HCE contributions.

According to the IRS, a highly compensated employee for 2021 is generally an employee who earned more than $130,000 in 2020.

To comply with the Employee Retirement Income Security Act (ERISA), a 401(k) plan must pass certain tests. Two common ones are the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests.

ADP Test

This test compares HCEs’ and non-HCEs’ deferral percentages — or, percentage of compensation contributed to the plan. To pass, the highly-compensated group’s ADP may not exceed the ADP for the non-highly-compensated group by 1.25 percent or the lesser of 2 percentage points or two times the NHCE ADP. For example, if the annual deferral percentage of non-HCEs is 3%, the average deferral percentage of HCEs can’t exceed 4.25%, or 5% if using the latter calculation.

ACP test

The ACP test uses a similar method as the ADP test, but it takes employer matches into account, if offered.

Of course, different employers set a protocol to ensure that non-discimination tests are passed. So the actual 401(k) contribution limit for an HCE may vary across different companies — especially those where employee income gaps are wide. If a company fails these tests and can’t find a solution, it may refund contributions to highly-compensated employees.

What retirement investments can you make after you’ve reached your contribution limits for the year?

If you’ve maxed out your 401(k) plan, there are few other savings vehicles you can invest in.

Traditional IRA

These function similarly to 401(k) plans. They offer tax-deductible contributions and tax-deferred growth on your investments. With a 401(k) plan, your investment options are typically limited to an investment menu chosen by the plan sponsor.

But IRAs virtually give you access to the entire securities universe. You can invest in all sorts of mutual funds, ETFs, stocks, bonds and more across various sectors and countries. For 2021, the IRA contribution limit is $6,000 ($7,000 if you’re 50 or older).

Roth IRA

Unlike 401(k)s and traditional IRAs, Roth IRAs don’t offer tax-deductible contributions. But, you can make tax-free withdrawals at retirement. And you can withdraw your contributions without penalty and taxes whenever you want.

The contribution limit is the same as with a traditional IRA. But that limit applies to combined contributions in a traditional IRA and Roth IRA if you have both. Also, keep in mind there are income limits to contribute to a Roth IRA.

Brokerage account

Also called a taxable account, this is your standard investing account. You’ll pay taxes on capital gains, interest and dividends you get from your investments. But there are no investment limits.

Health savings accounts (HSAs)

If you have a high-deductible health plan (HDHP), you can pair it with an HSA. These are savings accounts that offer triple tax benefits. You can make tax-deductible contributions, money in the account grows tax-free and withdrawals are tax-free if you use the money on qualified health care expenses.

The 2021 HSA contribution limit is $3,600 for those with individual coverage and $7,200 for those with family coverage. One of the biggest challenges you may face in retirement could be health care costs. HSAs are designed to help you hedge against that.

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Bottom line

The 401(k) contribution limits for 2021 are $19,500 or $26,000 if you’re at least 50. But if you max out your 401(k), you have other options such as a traditional IRA, Roth IRA, brokerage account or HSA. You can open IRAs with most brokerage firms. But fees and features vary so make sure you compare your brokerage platforms.

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