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contributions allowed by the IRS. 401(k) pretax contributions: subtracted from taxable income, and taxes are paid when withdrawn Roth 401(k) contribution (Designated Roth account): Money goes in after taxes are paid, and withdrawals are tax-free After-tax 401(k) contributions: Money goes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 made up 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. One is a limit on the maximum amount you can contribute as a salary deferral. The other limit is 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. That brings the annual total to $26,000 for taxpayers 50 and over.

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 are the total maximum amount that can be contributed. This number is a combination of both your own and your employer’s contributions.

In some cases, you can contribute additional amounts to other types of plans; these may include a 457 plan, Roth IRA, or traditional IRA. It all depends on your income and the types of plans available to you.

If You Are Self-Employed

If you are self-employed, you can set up what is often called an "Individual 401(k)" or "Solo 401(k) plan." It's also known as an "Individual(k) plan." This savings and investment account allows you to contribute salary-deferral contributions as an employee. At the same time, you can 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 means that 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 of the gain is tax-free; you pay no tax when you withdraw it.
  • After-tax 401(k) contributions: Money goes in after taxes are paid, which means that it won't reduce your annual taxable income. But 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. You can avoid this by rolling over the sum into a Roth IRA.

How Much To Contribute to a 401(k)

Most of the time, you should contribute enough to your 401(k) to receive all employer matching contributions that are available to you. Careful tax planning should be used to decide which type or types of 401(k) contributions would be more beneficial to you (i.e., deductible or Roth contributions).

How To Invest 401(k) Money

You’ll also need to decide how to invest your 401(k) money. One option, which most 401(k) plans offer, is target-date funds. 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 gets nearer. 

These funds also have model portfolios you can choose from and online tools to help you assess how much risk you want to take. You can also decide which fund choices would match up best with your desired level of risk.

How To Get Money out of Your 401(k)

Your 401(k) money is meant 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; you let the money grow for your future use.

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

You can start taking 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.

Note

If you have rolled over 401(k)s from past jobs into your existing account, you can also access those funds penalty-free if the Rule of 55 applies to you.

The money in a 401(k) account can also be withdrawn without penalty for a few other reasons; for instance, 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.

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

When a Withdrawal Penalty Applies

While you can take money out of your 401(k) without penalty for a few reasons, you'll typically still pay income taxes on it. What if you just want to take the money out to do some shopping before you've reached age 59 1/2, or before age 55 if the Rule of 55 applies to you? Well, the IRS will hit you with a 10% penalty on top of taxes. That means that expenses such as a new car or a vacation don't count as reasons to take out your 401(k) savings.

Important

Once you turn age 72 (or 70 1/2 if you turned that age in 2019 or earlier), the IRS will require you to start taking required minimum distributions (RMD) from your 401(k) If you don't take these withdrawals, the penalty is a steep 50% of the amount you should have taken.

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. It 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. That 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' limits were 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

Frequently Asked Questions (FAQs)

How often can I change my 401(k) contribution?

There's no legal limit to how often you can change your contribution amounts, but your plan administrator may have limits or stipulations about this. Check with your administrator to find out how frequently you can make changes.

What is a good 401(k) contribution?

Your ideal 401(k) contribution depends on several factors. If your employer offers a match, your first priority should be to contribute enough to get the full match. From there, you may want to max out a tax-free retirement account such as a Roth IRA before you finish maxing out your 401(k). If you're able to do all three of these, it can help you get the most out of your investments.

What happens if you exceed the 401(k) contribution limit?

If you go over the maximum 401(k) contribution for a given tax year, this is called an "excess contribution." Excess contributions are subject to double-taxation if you do not disburse them by April 15 of the year following the tax year in question. If you discover you made an excess contribution, reach out to your plan administrator immediately to correct the issue.