Here’s the maximum you can save towards your retirement in your 401(k) plan in 2021

WITH 2021 right around the corner find out the maximum you can save towards your 401(k) plan and establish a savings strategy that works to your advantage once your retirement approaches.

The IRS has released the 2021 maximum contribution limits for certain tax-advantaged accounts, which included your 401(k) plan, individual retirement account and healthcare flexible spending accounts.

2021 Traditional and Roth IRA contribution limits

The IRA contribution limits for traditional and Roth accounts in 2021 will be unchanged as 2020’s.

If you’re under 50, you can put in up to $6,000 in 2021.

If you’re 50 or over, you get a $1,000 catch-up that raises this limit to $7,000.

However, the income limits for contributing to a Roth IRA are increasing in 2021.

In 2020, direct Roth IRA contributions were barred for:

  • Single tax filers and heads of household earning over $139,000.
  • Joint filers earning over $206,000.
  • Married couples filing separately earning over $10,000.

In 2021, these thresholds are:

  • $140,000 for single tax filers and heads of households.
  • $208,000 for married couples filing jointly.
  • $10,000 for married couples filing separately (unchanged from 2020).

If you earn too much money in 2021 to contribute to a Roth IRA directly, an alternative you can consider is the “backdoor Roth.”

The “backdoor Roth” is where they make a non-deductible contribution with after-tax dollars to a traditional IRA and then convert it to a Roth.

You’ll pay taxes on the money you move over, but you’ll then get to enjoy the many benefits Roth IRA’s offer.

Contributors can also convert a Roth 401(k) to a Roth IRA and since both have the same tax treatment, you won’t be hit with taxes on the amount you move over.

While there are no income limits for contributing to a traditional IRA there are income limits for tax-deductible contributions if you’re covered by another workplace plan like a 401(k).

These are the limits in 2021:

  • $76,000 for single filers and heads of households (up $1,000 from 2020).
  • $125,000 for married couples filing jointly (up $1,000 from 2020).
  • $10,000 for married couple filing separately (no change from 2020).

If you don’t have a workplace retirement savings plan but your spouse does, these income limits apply to you:

  • $206,000 for married couples filing jointly (no change from 2020).
  • $10,000 for married couple filing separately (no change from 2020).

Traditional and Roth 401(k) contribution limits for 2021

The contribution limits for 401(k)’s aren’t changing in 2021.

The limits are staying steady at $19,500 for workers under 50 – while those 50 and over retain the $6,500 catch-up opportunity that brings their total allowable contribution to $26,000.

These limits also apply to 403(b), most 457 plans and the federal government’s Thrift Savings Plan.

However, the overall limit for 401(k) plans increasing to $58,000 in 2021, but that limit won’t apply to everyone.

It will only apply to those whose employers allow for after-tax salary deferrals in a 410(k), as well as those entitled to fund a solo 401(k) or SEP IRA.

The new $58,000 limit on after-tax 401(k) contributions includes the $19,500 you can defer pre-tax from salary, also any employer contribution to your 401(k).

Catch-up contributions fall outside this limit.

2021 SIMPLE IRA contribution limits

The Savings Inventive Match Plan for Employees IRA is a special IRA designed for small businesses.

The contribution limits for SIMPLE IRA’s isn’t changing in 2021, which means workers under 50 can put in up to $13,500.

Workers 50 and over get a $3,000 catch-up that brings their total to $16,500.

2021 SEP IRA and solo 401(k) contribution limits

Those who are self-employed get the option to save in a Simplified Employee Pension IRA or a solo 401(k).

The limits for these retirement plans are increasing by $1,000 in over 2020’s limit.

In 2021, the limit will be $58,000.

SEP IRA’s don’t offer catch-up contributions since they’re funded on the employer side, the $6,500 catch-up contribution applies to traditional and Roth 401 (k)’s applies to solo 401 (k)’s as well.

This means that if you’re 50 or older, you can max out your solo 401(k) at $64,500 in 2021.

The more money you put into a retirement plan in 2021, the more tax savings you’ll reap, while also maxing out your retirement plan, which will put you in a stronger position to afford your senior years.

However, if you’re not in the position to max out your retirement plan in 2021, your next best bet is to save as much as you can with the goal of ramping up your contribution rate as your financial picture improves.

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