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IRA Contribution Limits for 2020 vs. 2021

IRA Contribution Limits for 2020 vs. 2021

If your employer offers a 401 (k) plan, this can be one of the easiest and most effective ways to save for retirement. But while one of the main benefits of 401 (k) plans is that they allow you to automatically deposit a portion of your payment into your account, there are limits on how much you can contribute.

Each year, usually in October or November, the Internal Revenue Service (IRS) reviews and sometimes adjusts contribution limits for 401 (k) plans, individual pension accounts (IRAs), and other means of savings for individuals' pensions. The Internal Revenue updated the contribution limits for 401 (k) plans in 2020 on November 6, 2019, increasing the employee contribution from $ 19,000 to $ 19,500. On October 26, 2020, the IRS made updates for 2021. Employee contribution remained at $ 19,500. The catch-up contribution remains the same at $ 6,500.

One change that has occurred is the limit on combined employer/employee contributions. This amount is increased to $58,000, and when you add a catch-up contribution, the limit increases to $ 64,500.


Key Points to Note

  • Anyone aged fifty and above is entitled to an additional catch-up contribution of $ 6,000 in 2019 and $ 6,500 in 2020 and 2021.

  • Employees are already 100% vested in their contributions. There may be a vesting program for their match.

  • Employees can contribute up to $ 19,500 to their 401 (k) plan for 2020 and 2021.

  • Employers can contribute too, but for 2020 there was a limit of $ 57,000 for combined employer and employee contributions ($ 63,500, if eligible for a catch-up contribution).

  • In 2021, the combined limit increased to $ 58,000 - $ 64,500 with the collective contribution.


Basic Limits Increased in 2020 and Remain Stable in 2021

The basic employee contribution limit for 2020 is $ 19,500, compared to $ 19,000 in 2019 and $ 18,500 in 2018. The $ 19,500 limit includes all salary deferrals of elected officials, as well as contributions after taxes to a Roth account designated under the 401 (k) plan or, in particular, Roth 401 (k)

The same contribution limits apply to 403 (b) plans and 457 plans, and the Federal Government Savings Plan. The basic limits remain the same in 2021. 

If you have multiple 401 (k) accounts, your total contributions to all of those accounts, traditional and Roth, cannot exceed the limit of $ 19,500. Contributions made to other types of retirement accounts, such as IRAs, do not affect the 401 (k) contribution limit.

To encourage workers nearing retirement to accelerate their savings, the IRS allows 401 (k) members over age 50 to make additional contributions beyond the standard contribution limit. If you are 50 or more. Also, you can add $6,500 additional contribution in 2020 (compared to $ 6,000 in 2019 and 2018) for a total of $ 26,000. This figure remains the same in 2021.


Employer Contributions

Another great benefit of joining a 401 (k) plan is that your employer can contribute as well. Several employers match employee contributions by adding, for example, 50 cents or $ 1 for every dollar contributed by the employee. Employers can also make voluntary contributions, whether or not the employee contributes, up to certain limits. The general limit for total employer and employee contributions for 2020 is $ 57,000 or 100% of the employee's salary (which is subject to a maximum of $ 285,000), whichever is lower. After 50 years, the basic limit is $ 63,500 ($ 57,000 plus an upgrade fee of $ 6,500).

In 2021, the aggregate limit for total employer and employee contributions is $ 58,000, and if you are 50 or older, the basic limit is $ 64,500.


Limits For Well-Paid Employees

If you earn a very high salary, you may be considered a Highly Paid Employee (HCE), subject to tighter contribution limits. To prevent richer employees from unfairly receiving 401 (k) tax benefits, the IRS uses the Actual Deferment Percentage Test (ADP) to ensure that employees at all compensation levels participate proportionately in their company's plans. If non-highly paid employees (NHCE) do not participate in the company's plan, HCE's amount may be limited.


Contributions Over 2020 Limits

Evaluating estimated contributions for the following year and analyzing your contributions at the end of a calendar year can be very important. If you find that your contributions exceed the 2020 limits, the IRS will request notification by March 1, 2021, and excess carry-overs must be returned by April 15, 2021.


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