What's the 401(K) Contribution Limit?

A 401(k) is one of the best ways to save for retirement. Most Americans use the 401(k) as their primary retirement savings vehicle. And why not? It’s also one of the most convenient. Most are automatically enrolled through their employer, and contributions are made automatically through their paychecks. So what’s stopping employees from designating their entire salaries to their 401(k)s? Unfortunately, the IRS sets limits on 401(k)s on how much individuals can contribute, how much employees can make and still participate, even how much employers can match.

The limits for 401(k) contributions change year to year. The IRS increases these limits to match inflation. For instance, the contribution limit for 2020 and 2021 was and is $19,500. However, the 2019 max 401k contribution limit was $19,000. The total 401(k) contribution limit from both employees and employer match was $57,000 in 2020 and $58,000 in 2021.

It’s essential to know the IRS 401(k) limits because if you contribute too much, you could be faced with serious monetary consequences. If the excess amount isn’t withdrawn by the following April 15, it will be subject to an effective double taxation. First on the income that was contributed and again when it’s distributed during retirement. Let’s go over each 401(k) limit so you can better manage your 401(k) and maximize its potential.

What's the total 401(k) contribution limit for 2020?

The contribution limit for employees in 2020 was $19,500. However, there is no limit to the percentage of gross income an employee makes. The $19,500 is the same limit whether an employee made $30,000 in 2020 or if they made $100,000.

Additionally, the IRS limited the number of total contributions that can be made towards a 401(k). While individuals could contribute $19,500, the total amount couldn’t exceed $57,000. This means that both employee contributions and employer matching contributions couldn’t exceed $57,000.

2020 401(k) catch-up contribution limits

For individuals over 50, the IRS allows for catch-up contributions. While those under 50 were limited to $19,500 in 401(k) contributions, those over 50 were allowed to contribute $26,000. The additional $6,500 is considered a “catch-up bonus” by the IRS and is allowed to exceed the standard limit for younger 401(k) participants.

What's the total 401(k) contribution limit for 2021?

The 401(k) contribution limits for individuals in 2021 are the same as in 2020. For 2021, 401(k) contributions are limited to $19,500 for individuals regardless of income level.

However, the IRS increased the total 401(k) contribution limit from $57,000 in 2020 to $58,000 in 2021. Meaning there is more room for employers to match 401(k) contributions in 2021.

If your employer’s matching contributions in 2021 won’t get you to the 401(k) limit in 2021, there is a workaround that allows you to maximize your 401(k) contributions. It’s called a mega backdoor Roth 401(k) and provides employees a way to contribute more towards retirement. By utilizing this strategy, you can contribute a total of $38,500 towards a Roth 401(k).

Your plan must allow for “after-tax contributions” in order to take advantage of the mega backdoor Roth. After-tax contributions don’t count toward the $19,500 limits ordinarily set by the IRS.

2021 401(k) catch-up contribution limits

Again, for individuals over 50, the IRS allows for catch-up contributions. In 2021, those under 50 are limited to $19,500 in 401(k) contributions, while those over 50 are allowed to contribute $26,000—the additional $6,500 being the catch-up bonus.

What are 401(k) income limits?

The IRS doesn’t limit 401(k) plan participation by how much an individual makes. Whether employees earn $25,000 or $250,000, everyone can contribute to a 401(k) plan if their employer provides one.

However, the total contributions are limited by how much an individual makes. In 2021 the total 401(k) contribution limit is $58,000. Those that make less than $58,000 in 2021 won’t be able to contribute that full amount. That’s because the IRS limits total contributions to the lesser of 100% of gross compensation or $58,000 for 2021.

So, in essence, there is an income limit to 401(k) contributions in that total contributions can’t exceed a participant’s total annual income. This falls back on the rule across all retirement accounts that in order to be eligible to contribute towards a retirement account, an individual must have earned income during that year.

Employer 401(k) contribution limits for 2020

While the IRS doesn’t directly limit employers’ 401(k) matching contributions, there is a limit to how much they can contribute.

Falling back on the total 401(k) contribution amount, the limit for employer matching contributions can’t exceed $57,000 minus the employee’s contributions in 2020.

If the employee maxes out their 2020 contribution limit of $19,500, the maximum amount an employer can contribute towards their 401(k) is $37,500.

Since the average employer 401(k) match is 3.5% of employees’ salaries, it’s unlikely an employer would contribute that much.

Employer 401(k) contribution limits for 2021

Again, employers’ 401(k) matching contributions in 2021 are limited by the total 401(k) contribution limits for 2021.

In 2021, the total 401(k) contribution limit is set to $58,000. If an employee doesn’t contribute anything towards their 401(k), an employer can contribute $58,000 towards that employee’s 401(k).

Most likely, however, an employer’s 401(k) matching contributions will be limited to $58,000 minus the employee’s contributions.

Roth 401(k) limits

Covered in more detail in this article, Roth 401(k)s can be a great alternative to a traditional 401(k) if your employer provides one within their plan.

Roth 401(k)s often get confused with Roth IRAs. Both retirement accounts are funded using after-tax dollars, helping them enjoy the same tax-free withdrawals during retirement. However, there are a few main differences between the two accounts.

Roth 401(k)s are provided by an employer-sponsored plan, while outside institutions hold Roth IRAs. Roth 401(k)s can take advantage of an employer match and have higher contribution limits than Roth IRAs.

Roth 401(k) contribution limits

The contribution limit for Roth 401(k)s is much higher than those for Roth IRAs. However, Roth 401(k) contribution limits are the same as those for traditional 401(k)s.

Individual Roth 401(k) contributions limit is $19,500 for 2021. Total contributions made by employees and employer matches to a Roth 401(k) are limited to $58,000.

Roth 401(k) income limits

Unlike Roth IRAs who are limited to those who make less than $140,000 individually and $208,000 combined for married couples, Roth 401(k)s aren’t limited by the participant’s income levels.

Still limited not to exceed the Roth 401(k) participant’s total income; however, employees can still contribute to a Roth 401(k) regardless of how much they make annually.

Solo 401(k) contribution limits

For those who don’t work for a company, whether self-employed, a business owner, or a freelancer, a solo 401(k) is an excellent alternative to a traditional 401(k).

The IRS caps your total solo 401(k) contributions to $58,000 for 2020 and 2021. The elective deferral limit as the employee is $19,500. If you are over 50, an additional $6,500 catch-up contribution is permissible.

The most your employer's nonelective contribution can be is 25% of your compensation from the business, or until you reach $58,000 total, whichever is less.

The IRS has a helpful example to illustrate how this works:

“Ben, age 51, earned $50,000 in W-2 wages from his S Corporation in 2020. He deferred $19,500 in regular elective deferrals plus $6,500 in catch-up contributions to the 401(k) plan. His business contributed 25% of his compensation to the plan, $12,500. Total contributions to the plan for 2020 were $38,500. This is the maximum that can be contributed to the plan for Ben for 2019.”

Keep in mind that if your business is a side-business, these limits are tied to the person, not the account. If you participate in a 401(k) with another company, these limits apply to contributions you make to that account as well.