401(k) Contribution Limits: How Much Can You Contribute?
- A 401(k) is a good way to save for retirement. But did you know there are 401(k) contribution limits? Find out how many pretax dollars you can save this year.
A 401(k) is a type of qualified retirement fund. They're sponsored by employers, and if your employer chooses to offer a 401(k) and you qualify for the benefit, it can be a good way to help save for retirement. However, there are limits to how much you can contribute to a 401(k) every year. Find out more below.
How Do You Contribute to a 401(k)?
You contribute to this type of retirement savings by electing to do so via processes laid out by your employer. Typically, this involves signing up for the benefit and deciding how much of your paycheck you want to contribute.
You may decide, for example, to contribute 5% of your paycheck to your 401(k). If the 401(k) is tax-deferred, which is common, the amount you elect to contribute is taken from your earnings before taxes are applied, which can reduce how much you pay in taxes in the present.
What Was the 401(k) Contribution Limit for 2020?
The Internal Revenue Service sets rules for how much each individual can contribute to 401(k)s each year. This is to keep someone from contributing huge amounts to avoid paying taxes on the bulk of their income. The contribution limit is set each year. For 2020, most people could contribute up to $19,500.
Some people were able to contribute up to $6,500 more in catch-up payments. Catch-up payments are allowed by people who are 50 or older. This extra allowance each year allows adults nearer to retirement to bulk up their savings if desired.
What Is the 401(k) Contribution Limit for 2021?
The 401(k) contribution limits set by the IRS for 2021 are the same as those for 2020. That means you can contribute up to $19,500 to your 401(k) during 2021. Those aged 50 and older can contribute up to an extra $6,500.
Do 401(k) Contribution Limits Include Employer Match?
Some employers provide a match for contributions. For example, the employer might agree to match contributions to retirement funds up to 6%.
That means if you make $1,000 a week and elect to contribute 6%, you're adding $60 to your retirement fund each week. If your employer agrees to a match up to 6%, it would also add $60 to your fund. However, if you elected to contribute 10% and your employer only agreed to contribute up to 6%, you would contribute $100 and your employer would still contribute $60.
These extra amounts your employer contributes are not included in the IRS contribution limits.
Can You Save for Retirement Beyond 401(k) Limits?
Even if you max out your 401(k) contributions, you can continue saving for retirement during the year in other ways. You may be able to fund other types of retirement savings accounts, invest money or make strategic purchases, such as real estate. Investing and aggressive wealth building for retirement can get complex, though, so many people with these types of goals work with a professional financial advisor or retirement planner.