401k Rules

A 401(k) is a fabulous tool for savvy retirement savers, and it’s a great idea to get a jump on your retirement contributions early in the new year. With the beginning of 2021 comes a fresh start on a lot of financial things, so be sure you know the 401(k) rules for 2021 in order to make your plans. 

A lot about your 401(k) doesn’t have to change at all in 2021, while a few other aspects will adjust somewhat. Know what the rules are regarding 401(k)s for 2021. That will help you plan ahead and figure out the best game plan for your retirement savings. 

If you’re self-employed and need to build up your Solo 401(k), check out these guidelines for Solo 401(k) accounts

401(k) Contribution Limits for 2021

The total amount an individual can contribute to their 401(k) in the new year is the same as for 2020. You can put up to $19,500 of your income into a 401(k) account in 2021. 

You’d have to save $1,625 each month to be able to reach the maximum contribution amount.  

In addition, the same goes for most of the retirement plans that are similar to a 401(k). Your 403(b) account, most 457 accounts, and the federal government’s Thrift Savings Plan, or TSP, are included. They all come with a $19,500 max contribution per person. 

You’re allowed to make contributions into more than one 401(k), including a traditional or a post-tax Roth 401(k), but be aware that your contribution limits are for the sum total of all of these accounts. In other words, you don’t get to put in $19,500 in each separate account; your total contributions can’t exceed $19,500. 

401(k) Employer Matching

For those of us who are fortunate enough to work for an employer that matches retirement contributions, let’s review the limits on this. 401(k) rules for 2021 state that employers can contribute the same maximum amount as employees: $19,500. 

Of course, the amount an employer may match in 401(k) contributions varies greatly. They aren’t obligated to match 100% of the money you put away in your account. 

The typical employer match is somewhere between 3% and 6% of the employee’s salary. First, a common way is for an employer to match your contributions dollar-for-dollar up to a certain percentage. 

As a second possibility, employers may also decide to use a “stretch” match. This means the company matches half of employee contributions up to a maximum percentage of total salary or compensation.

Example:

  • Maximum of 8% of salary
  • Employer matches 50% of employee contributions up to 8%
  • Employee contributes 8% of their salary
  • Total employer contribution = 4% of employee salary 

Some employers may even choose to set a fixed dollar amount for all employees. This doesn’t necessarily encourage employees to contribute more. But as long as they put away something in a 401(k), the employer would then add in whatever amount they had chosen. 

If you’re in an awesome financial position and decide to put away your maximum $19,500, great! Then if your employer offers a 100% match of your contributions, the total maximum contributions for 2021 would be $58,000. (However, be aware that contributions can’t exceed your income, so if your income is below $58,000, that number would be your maximum.)

Catch-up Retirement Contributions

Another nice feature of most 401(k) retirement accounts is that you have a chance to sock away even more once you’re past a certain age. This is really helpful for several reasons.

At or past age 50:

  • your salary may be higher than before
  • your expenses may decrease due to children moving out or another change in lifestyle
  • you may not have saved much for retirement yet

If you haven’t yet been able to put much into your 401(k), once you reach age 50 and beyond,  you can make catch-up contributions. The maximum you can add is $6,500 to your yearly contributions under the new 401(k) rules for 2021. 

Combine the first $19,500 with the additional $6,500 in catch-up funds, and your total maximum 401(k) contribution for 2021 is $26,000. If you’re earning enough income to cover your expenses and put away that much for retirement, it’s a smart strategy to save as much as possible. 

The basic math tells us that in order to save $26,000 of your income, you’d need to set aside $2,167 per month. 

If you’re age 50 or older, be sure to pay attention to the increased maximum contribution you can enjoy. But if you’re younger, perhaps your parents or other older relatives would appreciate a little nudge to add these catch-up contributions to their nest egg. It’s good to talk to your parents about retirement, anyway. 

Saver’s Credit for Your 401(k)

For lower-income and moderate-income earners, there’s a benefit called the retirement savings contributions credit, or saver’s credit. A saver’s tax credit applies to those putting money into a 401(k), traditional or Roth IRA, 403(b), 457(b), TSP, and several other accounts. 

Depending on gross adjusted income, a person may be eligible for this tax credit worth 10%, 20%, or 50% of 401(k) or similar contributions. 

The 401(k) rules for 2021 stipulate that the maximum saver’s tax credit is $2,000 per individual. For a married couple filing jointly, this means a total of $4,000 for the two of them. 

Another change to note about the saver’s credit for 2021 taxes is regarding your income. The maximum income level has increased to $33,000 for individuals, $49,500 for head of household, and $66,000 for married couples. 

Make a 401(k) Part of Your New Year Strategy

As we begin a new year, we likely all think a bit extra about our goals and how we plan to accomplish them. It’s a great time to reflect on how well we adapted to the challenges of the past year. What were our goals a year ago? How did we fail or succeed? 

Getting your 401(k) started or continuing to max out contributions will help put you on the path to financial freedom. Knowing the contribution limits and other basic guidelines is important as you map out the upcoming year. 

Kate Underwood

Kate Underwood is a personal finance writer who frequently annoys her friends and family with finance recommendations. She pivoted a few years ago, leaving a longtime teaching career to pursue freelance writing, and has loved every minute of it! She's a mom of two and in her free time enjoys all things related to nature, hiking, and The Office.

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