Understanding 401(k) Contribution Limits

The 401(k) plan is one of the most popular tax-advantaged retirement vehicles amongst working-class Americans. Contributions made to a 401(k) plan are tax-deferred, meaning the money goes into the account pre-tax, and taxes aren’t due on the funds until withdrawal.

Of course, 401(k) plans have certain limitations too. You can’t tap the funds until age 59 ½ without paying a 10% penalty. You also can’t contribute more than a certain amount each year and still claim the tax break. However, the limits change frequently, and you’ll need to keep track of not only your own contributions, but those from your employer as well. Understanding 401(k) contribution limits is very important!

If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs.

Who Can Contribute to a 401(k)?

The 401(k) plan was designed to be an easy way for employers to provide retirement options to their workers in lieu of a pension. A 401(k) plan can’t be set up by an individual (unless they’re self-employed). It can only be created and implemented by the business owner. The business owner also chooses the investment options and fee structure of the plan. If you want to set up your own tax-advantaged retirement account, you’ll need to utilize a Roth or traditional IRA, which have more investment options but lower contribution limits.

One of the biggest perks of the 401(k) is the ease of the employer to contribute a match. Many employers will match a portion of their employee’s contributions up to a certain percentage. This is free money that should always be taken advantage of. Both employees and employers can make contributions to a 401(k), and both receive a tax break on those funds.

2021 Contribution Limits for 401(k) Plans

In order to prevent wealthier participants from getting too big a tax break, the federal government limits the amount that can be contributed to a 401(k) account each year. You’re probably aware of the individual contribution limits for this type of investment account, but you may not be aware that your employer has contribution limits for 401(k) plans too.

In 2021, the contribution limit for individuals remains unchanged from 2020. Workers under the age of 50 can contribute $19,500 to their 401(k) accounts in 2021. If you’re 50 or older, you get an additional $6,500 called a catch-up contribution.

Age2021 Individual Contribution Limit
Under 50$19,500
50 and over$27,000

Note that these particular limits are only for individual contributions. If your employer contributes $10,000 per year, you can still contribute the full $19,500 under the individual limit.

Employers also have limits on the amount they can contribute to their workers’ retirement plans (remember the business owners also get a tax break on their contributions). Most employers contribute by matching a portion of their workers’ contributions, but some also choose to use larger amounts. That’s why there’s an individual contribution limit and a TOTAL contribution limit.

Thankfully, the total contribution limit is much higher than the individual limit and continues to rise. In 2021, the total limit is getting a $1000 bump up to $58,000. If an employee maxes out their individual limit, the most an employer can contribute to their plan is $38,500. If no employee contribution is made, the employer can contribute the full $58,000. Total contribution limits also have a catch-up clause for employees aged 50 and over.

Age2021 Total Contribution Limit (All Sources)
Under 50$58,000
50 and over$64,500

Special Considerations Regarding 401(k) Plans

Employers and employees need to be aware of certain restrictions and rules governing their 401(k) plans. The IRS isn’t shy about handing out fines and restrictions for violations:

  • Highly-Compensated Employees. High-earners are penalized for using 401(k) plans if the lower-paid employees at the firm aren’t participating. Highly-compensated employees (over $130,000 in annual salary) must not contribute to their 401(k) accounts excessively compared to the less-wealthy workers. The IRS has a discrimination test that 401(k) plans must pass to avoid punishment.
  • Roth 401(k) Plans. Like a Roth IRA, the Roth 401(k) changes when the tax benefits are realized by the plan participant. Traditional 401(k) plans offer tax breaks on contributions, while Roth 401(k) plans offer the break on distributions. That means investment growth in a Roth 401(k) will be free from taxation.
  • Multiple Plans. You can participate in multiple 401(k) plans if you have multiple jobs, but your contribution limits are across ALL plans, not for each individual plan. If you have three different 401(k) accounts, you can only contribute $19,500 across the three accounts. If you over-contribute to your 401(k), make sure to contact your administrator and ask for the excess to be distributed. Otherwise, you may be taxed twice.

Work With an Experienced Financial Advisor

If you need more assistance understanding 401(k) contribution limits, reach out to a team member from Good Life Financial Advisors of Mount Pleasant today! We’re happy to help you.


The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.