The IRS released the contribution and tax-deferral limits for 401(k) plans, IRAs, and other retirement accounts for 2021. Changes are based on cost of living, and with low inflation in 2020, there are only a few changes of note in 2021 versus 2020.
401(k) employee contribution limits remain the same as 2020 (that amount will remain at $19,500). Like 2020, those over 50 years of age can make additional catch-up contributions of $6,500 per year (or $26,000 per year in total) to their 401(k) accounts.
The Total Amount You Can Defer Into a 401(k) is Increased to $58,000
The one 401(k) area of import that changed is the amount you can contribute and receive in total to your 401(k) account. If you receive company matching contributions or profit sharing, the all-in tax-deferral limit has been increased from $57,000 to $58,000 for 2021 with those over 50 years able to put in $64,500 with the catch-up. Here is a summary of the 2021 401(k) limits as compared to 2020:
|401(k) Limits for 2021|
|Employee contribution limit||$19,500||$19,500|
|Annual limit per individual||$58,000||$57,000|
|Age 50+ catch-up amount||$6,500||$6,500|
|Annual compensation limit||$290,000||$285,000|
|Highly compensated employees||$130,000||$130,000|
401(k) Saving Advantages Over Traditional IRAs Are Significant
The tax advantages for 401(k) savers versus those opting to use IRAs or don't have access to a 401(k) plan is large and is now even a bit bigger.
|401(k) Advantages Over Traditional IRAs in 2021|
|Annual limit per individual||$58,000
(employee + employer contributions)
|Age 50+ catch-up amount||$6,500||$1,000|
|Roth income limit||None||$140K*|
|Penalty-free access, if needed||Yes, via a loan||No|
*Beginning at $125K, the amount you are allowed to contribute begins to decrease, hitting $0 at $140K for singles (range is $198K to $208K for married couples filing joinly)
There is some good news for IRA savers. You can earn a little more and get to deduct your IRA contributions. Plus, the phase-out income limits for contributing to a Roth IRA are bumped up $1K to $2K depending on your filing status. In addition, the income limit for the Saver’s Credit for low- and moderate-income workers is $33,000 for singles and married filing separately for 2021, up from $32,500. It is $66,000 for married couples filing jointly for up from $65,000 and $49,500 for heads of household, up from $48,750.
Refer to IRS cost-of-living adjustment for 2021 in IRS Notice 2020-79 for more details.