Each year, the IRS specifies contribution limits for retirement accounts. These limits, based on inflation data from the year prior, determine how much a person (and their company in some instances) can contribute to a given plan. Below, we’ll quickly go over the limits for the common retirement accounts.
IRA & Roth IRA: $6,000 with a catch-up provision of $1,000 for Age 50+
This is an important one, as you’ll learn here at The Wealthy Idiots. The Roth IRA is an awesome retirement vehicle and you should certainly aim to contribute up to the maximum allowable. Remember, the combined limit for both the IRA & Roth IRA is $6,000 ($7,000 with catch-up), as it is not individually based. This means if you contribute to both, the contributions cannot exceed $6,000.
401(k), 403(b), and Profit-Sharing Plans: $19,500, $6,500 catch-up, and $58,000 defined contribution limit
The 401(k) is a widely-available plan that more and more Americans are participating in. For 2021, employees will be able to contribute $19,500, plus an additional $6,500 if they’re over 50. Additionally, the employer contribution limit is $58,000. This means if you are over 50 your contributions plus your employers could total $64,500 for 2021. Don’t forget, you can’t exceed these limits for multiple plans. Your combined contributions to all plans in this category can’t exceed the IRS limit.
Don’t get discouraged if you are not hitting these numbers. Instead, set goals with specific triggers and stick to your plan. Example: set a goal that you will increase your $401k contribution by one half of every pay raise you receive until you reach the IRS limit. This will help you hold yourself accountable. Also – don’t forget the match. You should always ensure you get the maximum employer contribution allowable.
457(b)/Deferred Compensation Plan: $19,500
This plan is commonly found among university employees, state and local governments, local boards of education, and nonprofit entities. Lesser known fact: you can contribute the IRS limit to a 401(k) or 403(b) plan AND contribute the IRS limit to a 457(b). That’s right, you can fully utilize both of these! The 457(b) also allows a special catch-up provision depending on your plan administrator. This provision allows participants to contribute twice the annual limit ($39k) for the three years prior to their normal retirement date determined by the plan. You’ll need to check with your plan administrator for more info on this.
For more information on these limits as well as income restrictions and special caveats, we encourage you to checkout the IRS website on contribution limits.
Health Savings Account (HSA): Self-only $3,600, Family $7,200; $1,000 catch-up for 55 and older
Good news for those of you that employ a HSA with a High Deductible Health Plan (HDHP) – the IRS increased the limit by $50 for self-only and $100 for family plans. Keep in mind, these limits are total, so the combination of individual, employer, and pass-through contributions cannot exceed these limits. If you are 55+ in this case, you get an extra $1k of contribution space. Additionally, there are restrictions for couples that have different plan types. Be sure to conduct your due diligence prior to switching to a HSA-eligible plan if you haven’t already.
Why is this important?
I know, you’re probably wondering why an extra $50 in your HSA really matters. Well, here at The Wealthy Idiots, we believe readers should be familiar with every penny of tax-advantaged space. If you understand taxes, and know the contribution limits set forth by the IRS, you are well-equipped to control the amount of taxes you pay and better plan for the future. Going forward, you can expect to see a similar article every November/December. Happy savings!