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.

401(K) Contribution Limits

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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