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401(K) contributions: What will the changes be this year?

What has changed this year for the 401(k) contributions? Discover everything here.

401(K) contributions
Source: Google

That year, the IRS announced that the employee’s 401(k) contribution limit will not change for 2021, which is $19,500, the same amount set for the 2020 tax season. Also, no changes will give the maximum contribution amount allowed. They represent the amount of additional contribution you can make to a 401(k) plan when you are 50 years of age or older.

For 2021, that number remains at $6,500. This means that the total contribution for plan participants over 50 is $26,000. Every year in October, the contribution limits are revised ​​according to 401(k).

Contribution limits increase more in years with the highest and lowest inflation rate, as has been the case in recent years. In some cases, there were even concerns that contribution limits might be reduced due to a negative inflation rate.

Fortunately, however, this scenario never ended and the limits were slightly raised or left unchanged.

What will the contribution limits be this year?

The rate of increase has typically changed at a snail’s pace over the past eleven years. As of 2009 alone the maximum contribution has been increased by $3,000 and the restructuring contribution has been increased by an even lower $16,500 for three consecutive years over the same period. Even more evident is the lack of increase in the reparation contribution for a total of six years, when the amount stood at $5,500 from 2009 to 2014. From 2009 to 2021, the maximum went from $49,000 to $58,000. That’s an increase of $9,000 over 10 years, which is over 2% per year.

Check the maximum contribution of the 401K, common, and the others in the table below:

Year401 (k) Maximumrecovery contributionMaximum allocation
2021$19,500$6,500$58,000
202019,500$6,500$57,000
2019$19,000$6,000$56,000
2018$18,500$6,000$55,000
2017$18,000$6,000$54,000
2016$18,000$6,000$53,000
2015$18,000$5,500$53,000
2014$17,500$5,500$52,000
2013$17,500$5,500$51,000
2012$17,000$5,500$50,000
2011$16,500$5,500$49,000
2010$16,500$5,500$49,000
2009$16,500$5,500$49,000

Each year, the maximum attribution is increased by the amount of the refundable recovery contribution (applicable to employees aged 50 or over). For example, for 2021, the maximum allocation is $63,500. This is the maximum grant of $57,000 plus the $6,500 upgrade fee.

Contribution limits are the same as for Roth

Contribution limits for Roth 401(k) contributions are the same as for traditional 401(k) contributions. This means you can contribute up to $19,500 a year to a regular 401(k) plan or a Roth 401(k) plan.

You will likely want to contribute to both; In that case, you will need to determine how much of the $19,500 limit will be allocated to each part of your 401(k). It is no accident that 401(k) limits are virtually the same as 403(b) and plan limits. Savings Plan (TSP). In addition, an equal employer contribution to the plans is not included in the employee contribution limits listed above.

Your employer may make a contribution that exceeds the normal contribution limit of $19,500 or even exceeds the combined contribution limit of $26,000 USD if you are 50 years of age or older. Finding out if a Roth 401k vs Roth IRA is right for you is always a good idea.

With the new limits, how much should I contribute?

The IRS decides annually whether or not to increase your contribution limits. Changes in the consumer price index (CPI) have sometimes been very small, for example, on the order of 2% per year. Congress prefers to increase contributions in increments of at least $500, which it has already done this year.

If you divide this amount into monthly contributions, you will only make slightly smaller payments, which you will benefit from in the long run. It’s an ideal strategy to continue maximizing your 401k at this level.

How to contribute to the 401(k) contributions?

  • Participation

For most workers, fixed contribution limits or the 401(k) level over the past three years are not the real issue. The real problem is the lack of employee participation. A large percentage of employees do not participate in a 401(k) plan, although one is offered by their employer.

How much do American workers deposit in their 401(k) accounts? Of course, each age group has different trends. Fidelity data shows that Americans in their thirties have an average of $38,400 in their 401(k) accounts, with an average contribution rate of 8% of income. For Americans in their 40s, that number was $93,400, again with an average contribution rate of 8%.

 The same data shows that workers in their 60s contribute 11% of their income to a 401(k).

Contribution limits have only increased $500 in five years, but $19,500 is still a huge potential tax-deferred savings. Do what you can to get as close to maximum contribution as possible, especially if you are approaching retirement.

  • maximum allocation

The highest number in the chart above for each year is in the Maximum Allocation column. This is the maximum amount you can pay for any of the tax-protected retirement plans available to you. In fact, this is a more important factor than most people realize.

Despite raising the 401(k) contributions limits, the average person is far from maximizing their potential contributions to any type of retirement plan. The 2021 maximum grant for all plans is a generous $57,000 or $63,500 for employees age 50 and older.

How to contribute to the IRA?

Even if your income exceeds the limit of a tax-deductible contribution – in addition to being covered by an employer’s plan – you can still make non-deductible contributions to a traditional IRA, regardless of your income.

An IRA contribution of $6,000, plus a contribution of $19,500 to a 401(k) plan, increases your contribution to $25,500 per year (or $32,000 if you’re 50 years old or older).

But in addition to IRAs, there are also several types of tax-free retirement plans for the self-employed, including SEP and SIMPLE IRAs. If you have an affiliated company, you can maintain these 401(k) plans for that company.

They allow you to put more money into a tax-protected plan. They can top $57,000 in total, which gives you plenty of room to make more contributions.

401(k) Contributions limits and the future

401(K) contributions
Source: Google

The good news is that we are witnessing an extended period of low inflation. In terms of cost of living, this is good news, although I have limited contribution limits to 401(k).

 As this seems like a long-term pattern, we should probably expect small increases over several years or non-existent contribution limits.<Br > However, this is an even stronger argument for maximizing the contributions made within the limits we set, as well as examining the ability to make contributions to other retirement plans such as IRAs or the various plans that are available to the employee himself.

We need to work within our limits and realize that they are more than enough to meet our retirement goals. These limits will allow us to do just that, even if they don’t increase significantly in the future.

What will change in 401(K) contributions as taxes increase?

Are you concerned about how a possible tax increase could affect your contribution to the 401(k) plan? Some experts expect multiple tax increases across the board due to COVID-19 spending. Tax increases can be passed on to individuals as an increase in property taxes, income taxes or even corporate taxes in 2021, which can result in a tax increase even for those earning less than $75,000 a year. .

Since tax increases can affect your monthly budget, it’s important to check your finances when these increases occur. Make sure you save enough each month to make the pension contributions you’re comfortable with.

Sam Nascimento

Graduated in law Specialist in economics, investment and personal finance. Its focus is to change people's financial lives.