2021 401(k) Contribution Limits, Rules, and More

Image shows types of 401(k) contributions allowed by the IRS. 401(k) pretax contributions: subtracted from taxable income, and taxes are paid when withdrawn Roth 401(k) contribution (Designated Roth account): Money goes in after taxes are paid, and withdrawals are tax-free After-tax 401(k) contributions: Money goes in after taxes are paid, and withdrawals are tax-free (any tax on interest can be rolled into a Roth IRA)

 Image by Hilary Allison © The Balance 2020 

Your 401(k) contribution limits are a combination of three factors.

  • Salary deferral contributions are the funds you elect to invest out of your paycheck. 
  • Catch-up contributions are additional money you may pay into the plan if you are age 50 or older by the end of the calendar year.
  • Employer contributions consist of funds your company contributes to the plan; also known as the company match or matching contribution, they may be subject to a vesting schedule.

There are two types of limits: a limit on the maximum amount you can contribute as a salary deferral and a limit on the amount of total contributions, which includes both your and your employer's contributions. 

2021 Salary Deferral 401(k) Contribution Limits 

Individual plan participants can contribute up to $19,500 of their wages in 2021. For those ages 50 and older, the catch-up contribution is capped at $6,500, for an annual total of $26,000.

2021 Total Annual 401(k) Contribution Limits 

Total contribution limits for 2021 are the following:

  • $58,000 total annual 401(k) if you are age 49 or younger
  • $64,500 total annual 401(k) if you are age 50 or older

The dollar amounts listed above represent the total maximum amount that can be contributed as a combination of both your own and your employer’s contributions.

In addition to these allowable contribution amounts, you can sometimes contribute additional amounts to other types of plans, like a 457 plan, Roth IRA, or traditional IRA. It all depends on your income and the types of plans available to you.

401(k) for Self-Employed People

If you are self-employed, you can set up what is sometimes called an Individual 401(k) or Solo 401(k) plan, sometimes called an Individual(k) plan. This savings and investment vehicle allows you to contribute salary deferral contributions as an employee and make profit-sharing contributions as the employer. 

Types of 401(k) Contributions That the IRS Allows

Many 401(k) plans allow you to put money into your plan in all of the following ways:

  • 401(k) pretax contributions: Money is put in on a tax-deferred basis—that is, it's subtracted from your taxable income for the year. You’ll pay tax on it when you withdraw it.
  • Roth 401(k) contribution (called a Designated Roth account): Money goes in after taxes are paid. All the gain is tax-free, and you pay no tax when you withdraw it.
  • After-tax 401(k) contributions: Money goes in after taxes are paid, meaning it won't reduce your annual taxable income. However, you will not pay taxes on the amount when you withdraw it. You might have tax due, at your ordinary income-tax rate, on any interest that's accumulated tax-deferred on the amount—though you can avoid this bite by rolling over the sum into a Roth IRA.

How Much to Contribute to a 401(k)

Most of the time, at a minimum, you should contribute enough to your 401(k) to receive all employer matching contributions that are available to you. Careful analysis and tax planning should be used to determine which type or types of 401(k) contributions (i.e., deductible contributions or Roth contributions) will be most beneficial for you.

How to Invest 401(k) Money

You’ll also need to consider how to invest your 401(k) money. One option, which most 401(k) plans offer, is target-date funds, in which you pick a fund with a calendar year closest to your desired retirement year; the fund automatically shifts its asset allocation, from growth to income, as your target date approaches. These funds also have model portfolios you can choose, online tools to help you assess how much risk you want to take, and what fund choices will match up best with your desired level of risk.

How to Get Money Out of Your 401(k)

Your 401(k) money is intended for retirement. It's not easy to take money out while you're still working without incurring a steep financial loss. The account is structured that way on purpose so that you are compelled to let the money grow for your future use. 

However, there are certain circumstances under which you can take funds out of your 401(k) without paying any penalty, although you'll still need to pay regular income taxes on the money since, most likely, it originally went into your on a pre-tax basis.

You can start taking permitted withdrawals once you reach 59 1/2 years of age. You can also take penalty-free withdrawals if you either retire, quit, or get fired anytime during or after the year of your 55th birthday. This is known as the IRS Rule of 55, and if you have rolled over 401(k)s from previous jobs into your existing account, you can also access those funds penalty-free if the Rule of 55 applies to your work-separation circumstances.

The money in a 401(k) account can also be withdrawn without penalty if you become disabled, have a court order to pay out the funds due to a divorce, or your beneficiary withdraws the funds upon your death.

Finally, you can take penalty-free withdrawals from your 401(k) for certain medical expenses, college tuition, or funeral expenses. You can also take the money for a down payment, repair of damage, or costs related to avoidance of foreclosure or eviction from your primary residence, but cannot withdraw it penalty-free to pay your mortgage payments.

When a Withdrawal Penalty Applies

While you can take money out of your 401(k) without penalty for several reasons, you'll typically still pay income taxes on it. If you just want to take the money out to do some shopping before you've reached 59 and 1/2 (or before 55 if the Rule of 55 applies to you), the IRS will hit you with a 10% penalty on top of taxes.

That means that expenses such as a new car, a vacation, or upgraded furniture don't qualify as reasons to take out your 401(k) savings.

Once you turn 70 and 1/2, the IRS will require you to start taking a required minimum distribution from your 401(k). If you don't take your required withdrawals, the penalty is a steep 50% of the amount you should have withdrawn.

You can also take money out of your 401(k) by taking a loan from your account. The amount is limited to 50% of vested funds up to $50,000 and must be paid back with interest within five years. You'll be penalized by missing out on the earnings growth on the borrowed funds, and if the loan isn't paid back on time, the funds are treated as a regular withdrawal. This means that you'll pay regular income tax plus the 10% penalty on the borrowed funds.

Past 401(k) Salary Deferral Contribution Limits

Every few years, the IRS increases the amount that individuals can invest in their plans. Previous years' contribution limits are as follows:

Year Salary Deferral Catch-Up
2021 $19,500 $6,500
2020 $19,500 $6,500
2019 $19,000 $6,000
2018 $18,500 $6,000
2017 $18,000 $6,000
2016 $18,000 $6,000
2015 $17,500 $6,000
2014 $17,500 $5,500
2013 $17,000 $5,500
2012 $16,500 $5,500