This article was last updated on October 26
[Updated with official IRS 2021 401k limits] The IRS has now released 2021 401k limits in Notice 2020-79, which as expected see little to no change from 2020 levels. The table below shows what the contribution limits for 2021 versus 2020 (current tax year) will be at the individual/employee level.
Key highlights include:
- No change to the employee elective deferral limit, meaning the maximum an employee can contribute to 401k plans across the year will stay at $19,500
- Highly compensated employee threshold remains at $130,000
- Catch-up contributions for those over 50 remains at $6,500
Employer Contribution Component
A lot of people assume the maximum annual contribution to employer sponsored retirement plans like a 401(k), 403(b) or Government Thrift Savings Plan (TSP), are what is published at the individual level. However, this could be very misleading if your employer contribution or match is generous and/or you are a high income earner.
Let me give you an example to illustrate my point. Suppose Mike works for an employer who matches 100% of contributions – and there are quite a lot of employers who offer generous matching to attract talent. Mike earns $200,000 a year as Senior Director or IT. He contributes to his employer sponsored 401k plan up to the individual maximum of $18,000 per year. However because his employer matches his contribution his total non-taxable contribution for that year is a whopping $36,000. Well above his individual contribution and add make a substantial to his retirement savings.
The point being is that don’t just look at the individual contribution limits (which change every year). Consider the grand total and where possible make sure you employer provides as generous a contribution as possible. Or if picking a new employer, look closely at their matching 401K contribution to try and get the maximum match.