Retirement Accounts

What are the 2021 401(k) contribution limits?

Covered by a 401(k) plan at work? Good news – the contribution limit went up in 2021.

Adam Cecil

Published November 27th, 2020

Table of Contents

Key Takeaways

  • If you’re over the age of 50, you can contribute an additional $6,500.
  • Before deciding what to contribute this year, talk to a financial advisor about your savings options and whether or not it makes more sense to pay off debts.
  • The 401(k) contribution limit in 2021 is $19,500.

Covered by a 401(k) plan at work? The contribution limit remains the same from what it was in 2020. The maximum you can contribute to a 401(k) plan in 2021 is $19,500. This goes for employees covered by 403(b) plans and most 457 plans, too.

401(k) retirement plans can be a great way to save for retirement. For starters, there are tax benefits. With a traditional 401(k), employees automatically choose a certain amount or percentage from their paycheck to put aside for retirement. This contribution is made before taxes are taken out of your paycheck, so your actual taxable income is reduced by the amount you put in your 401(k). Inside your 401(k), your money can be invested in a variety of stock and bond funds, and grows tax free.

Additionally, many employers match contributions up to a certain amount. For example, your employer may match a contribution of up to 3% of your paycheck. The total amount contributed to your 401(k) would then be 6% of your gross annual earnings. We suggest taking full advantage of any employer match that’s offered, as it’s free money that can easily double your retirement contributions at no cost to you.

When considering how much to contribute to your 401(k) plan, don’t forget to talk to your financial advisor about what the most efficient savings vehicle is to use, as well as how to balance paying down debts versus savings.

Catch up 401(k) contributions in 2021

Over the age of 50? You’re allowed to make what are called “catch up contributions” to your 401(k), 403(b), and 457 plans, which are extra amounts on top of the normal contribution limit. The maximum catch up contribution you can make is $6,500, the same as in 2020. This means that people over the age of 50 can contribute a total of $26,000 to their 401(k) plans in 2021.

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When can you withdraw money from a 401(k)?

401(k) contributions are intended to be used in retirement, so there are rules around when you are allowed to start withdrawing money from them. Generally, you have to be 59 ½ years old to start taking distributions from your 401(k). If you take money out earlier, you’ll owe a 10% fee on the withdrawal and the withdrawal will be taxed at your regular rate.

There is one big exception, however – if you’re 55 or older and you leave your job, whether because you quit or are laid off, you can take distributions from your 401(k) without penalty.

At some point in your retirement, you will be required to begin taking Required Minimum Distribution (RMD) withdrawals on your retirement accounts. This age varies depending on the year that you were born. For retirees born before July 1, 1949, IRA and 401(k) funds must be withdrawn by April 1 of the year following the calendar year in which you reach age 70 ½. For retirees born after July 1, 1949, the first required minimum distribution (RMD) of IRA or 401(k) funds must happen by April 1 of the year following the calendar year in which you reach age 72.

If you don’t, the amount you don’t withdraw is taxed at 50%, which is obviously not ideal. You are allowed to take out more than the Required Minimum Distribution, however – it is just a minimum. The Required Minimum Distribution is calculated for each account individually, and it’s up to the account holder to make sure they calculate it correctly.

Bottom Line

401(k) plans can be great ways for people to save for retirement, especially since many employers offer matching contributions. Talk to a financial advisor about how much you should contribute to your 401(k) plan this year. Make sure to balance savings versus paying down your debts, as debts can be more expensive in retirement than not having savings.

Retirement Accounts

Understanding 401(k)s

401(k) Rules

Cashing Out your 401(k)

Understanding Roth 401(k)s

Roth IRA Basics

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Author

Adam Cecil

Writer, video maker, and podcast producer based in Brooklyn. Previously a staff writer at Policygenius, helping people find the insurance coverage they need. Find out more.

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