Contribution Limits

You can’t save as much as you want. If your mortgage is paid, the student loans paid off, the children self-sufficient, and your rental income more than enough to live on, you might want put your entire salary into your 401(k). Your income, after all, would then become effectively tax-free until you retire. If you use a traditional 401(k), you’d pay income tax during distribution, but you’d pay nothing until then.

The government is wise to that plan. The limits it places on contributions to a 401(k) plan change from year to year; they rise with inflation. In 2021, the maximum contribution is $19,500, or $26,000 for people aged over 50. Employers can only match those contributions so the total limit that an employee can put in their 401(k) plan each year is $58,000 or $64,500 for workers aged over 50.

Unless you’re a very high earner, it’s unlikely that you’re going to reach those limits. So you’re going to be faced with a much tougher question about the amount that you should save for your retirement. It’s likely to be less than $26,000.

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