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What Are the 401(k) Contribution Limits for 2021?

Do you know what simple step most millionaires took to help them build their wealth? Believe it or not, they didn’t roll the dice on flashy investment trends or inherit most of their seven-figure net worth. Nope! More than anything else, they put money in their 401(k).

That’s right! According to the National Study of Millionaires, eight out of 10 millionaires invested in their company’s 401(k) plan. They put money into their accounts month after month, year after year, until one day they looked up and their net worth was in the seven figures. And if they can do it, you can too!

One of the amazing things about a 401(k) is that it lets you put thousands of dollars away each year for retirement. So if you’re one of the millions of Americans with access to a 401(k), don’t take it for granted!

But just how much can you put into your 401(k) in 2021? Let’s take a look.

401(k) Contribution Limits For 2021

The 401(k) contribution limit is $19,500.
The 401(k) catch-up contribution limit for those age 50 and older is $6,500.
The limit for employer and employee contributions combined is $58,000.
The 401(k) compensation limit is $290,000.

What Are the 401(k) Contribution Limits for 2021?

You can invest up to $19,500 in 401(k) plans in 2021, and anyone age 50 or older can put in an extra $6,500 as a “catch-up” contribution (that’s a grand total of $26,000 for those keeping score).1

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Those limits also apply to folks with 403(b)s, most 457 plans, and the government’s Thrift Savings Plan (TSP). In most cases, all your contributions to a 401(k) are due at the end of the calendar year.

And these contribution limits apply to traditional 401(k)s and Roth 401(k)s. Both are employer-sponsored retirement savings accounts, but they’re taxed differently. Your contributions to a traditional 401(k) are made before any taxes are taken out. That means you’ll get a tax break now, but you’ll pay taxes on withdrawals later on in retirement.

With a Roth 401(k), it’s the other way around! The money you put in has already been taxed, so it will grow tax-free and you won’t have to pay any taxes when you take that money out in retirement. (For the record, if your company offers a Roth 401(k) option, we recommend you take advantage of it!)  

What Is the Maximum an Employer Can Contribute to Your 401(k) in 2021?

One of the best things about a 401(k) is that most employers offer some kind of match on your contributions, usually up to a certain percentage of your salary. In fact, about 86% of companies with a 401(k) plan provide a match on employee contributions.2 And the average employer 401(k) match is around 4.5% of your salary.3 That’s great news for you. After all, an employer match is basically free money!  

But there is a limit on how much you and your employer can put in together. Between you and your employer, the maximum that can be put into your 401(k) in 2021 is $58,000 (if you add catch-up contributions, that limit rises to $64,500).4

Is There an Income Limit for Contributing to a 401(k)?

Not exactly. If you have access to a 401(k) plan at work, you can put money into it no matter how high or how low your salary is. But listen up, high-income earners: The IRS does limit how much of your salary and compensation is eligible for a 401(k) match.

For 2021, the compensation limit (which is the amount of your income that’s used to figure out 401(k) contributions and matches) is limited to $290,000.5 So keep that in mind!

Here’s how it works. Let’s say you make $500,000 this year and your company offers a 4% match on your 401(k) contributions. You contribute the maximum $19,500 amount that you’re allowed to put into your 401(k) this year. But instead of matching that $19,500 (4% of $500,000 is $20,000), your employer only contributes $11,600. Why? Because your employer is only allowed to apply your match on up to $290,000 of your compensation, and 4% of $290,000 is $11,600.  

How Much Should You Save for Retirement?

We recommend investing 15% of your gross income into retirement savings accounts like a 401(k) and IRA. We also suggest investing in four types of mutual funds—growth and income, growth, aggressive growth, and international—inside of those retirement accounts.  

And listen, we know you’re eager to start saving money for your retirement future . . . but if you are still getting out of debt or need to get a solid emergency fund in place, now is not the time to save for retirement. Your income is your number one wealth-building tool, and you won’t be able to take full advantage of it if it’s tied up in credit card or student loan payments.

So let’s say you’re out of debt with a fully funded emergency fund and you have an annual salary of $75,000. That means you should set a goal to save $11,250 each year for retirement. But where do you start? Let’s walk through it step-by-step.

1. Take the 401(k) match.

Does your workplace offer you a 401(k) with an employer match? That is the perfect place to start saving for retirement! Your first step should be to invest up to the match into your 401(k).

So if you make $75,000 per year and your employer matches 5% of your contributions, you should invest your first 5% (which comes out to $3,750) into your 401(k) so you can get that match (aka free money!). And listen, do not count your employer’s match as part of your 15%. Think of the match as the icing on the cake and not part of the cake itself.

What about the remaining 10%? Well, if you have a Roth 401(k) and you like your investment options, then you could go on ahead and invest your entire 15% right there. Done! But if you only have a traditional 401(k), then it’s time to talk about the Roth IRA.

2. Contribute to a Roth IRA.

The Roth IRA is the peanut butter to the 401(k)’s jelly—they just go better together! The beautiful thing about the Roth IRA, which stands for “individual retirement account,” is that it lets you enjoy tax-free growth and tax-free withdrawals in retirement. Tax-free . . . don’t you just love the sound of that?

In 2021, you can put up to $6,000 into a Roth IRA (and an extra $1,000 catch-up contribution if you’re age 50 or older).6 Sticking with our example above, maxing out your Roth IRA and investing $6,000 into your account brings your total retirement savings for the year to $9,750 . . . just a little bit short of your retirement savings goal.

So what are we going to do with the remaining $1,500? It’s time to send you back . . . back to the 401(k)!

3. Invest the rest in your 401(k).

If you invested up to the match in your 401(k), maxed out your Roth IRA and still haven’t hit 15%, don’t panic! You can still go back and invest the rest in your 401(k).

In this case, you’d invest the remaining $1,500 you have left back into your 401(k). Woo-hoo! You hit 15%!   

Work With a Financial Advisor

Whether you have questions about your 401(k) investment options or want to open up a Roth IRA, working with a trusted and qualified financial advisor can go a long way. They can help answer all your investing questions and give you the guidance you need to start investing for retirement and building wealth.

Don’t have an advisor? We can help with that! Our SmartVestor program can connect you with up to five financial advisors who are ready to help you take the next step toward the retirement you’ve always dreamed about.

Ready to get started? Find your SmartVestor Pro today!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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