The IRS has left employee contribution limits unchanged from 2020 for 401(k) and other retirement plans.
The contribution limit will remain at $19,500 for employees participating in several types of employer-sponsors retirement plans, including:

  • 401(k)

  • 403(b)

  • Most 457 plans

  • Federal government’s Thrift Savings Plan (TSP)

Employees age 50 and over can make contributions in excess of the $19,500 limit to these types of plans. These additional contributions, referred to as “catch-up contributions,” are limited to $6,500 in 2021. There is no increase to this catch-up amount from 2020. Therefore, the total amount employees age 50 and over could contribute into their employer-sponsored retirement plan for 2021 is $26,000 ($19,500 + $6,500).

Why Revisit If The Limits Haven’t Changed?

Although the limits remain unchanged for 2021, the beginning of the year can be a good time to revisit your payroll contributions to confirm that you will continue to reach your desired contribution level or the IRS maximum.

  • If your pay has increased, you may need to adjust the percentage of your pay that is contributed.

  • If you are turning 50 this year, you can increase your contributions to include the additional catch-up amount.

  • Some plans will allow you to “maximize” contributions. This allows contributions to be evenly deducted each pay period throughout the year to make sure that you reach that year’s contribution limits. The per pay period amount is sometimes recalculated each year to make sure you hit the maximum without the need to adjust the contribution percentage.

What If I Want to Save More In My 401(k)?

Some employer-sponsored retirement plans, such as 401(k)s, may allow you to contribute additional funds after-tax to your retirement plan. The ability to contribute after-tax funds can vary based on the provisions of your company’s plan.

The IRS allows a total of $58,000 to be saved in a 401(k) account for 2021 ($64,500 including catch-up for an employee age 50 and over). This total amount includes:

  • Elective deferrals and catch-up (discussed above)

  • Employer matching contributions

  • Employer nonelective contributions such as profit sharing or safe harbor

  • After-tax contributions (if permitted)

One of the benefits of after-tax contributions is that after-tax funds can be rolled over in the future to a Roth IRA account. These contributions can lead towards accumulation of an after-tax balance over time when you may not be able to make contributions directly to a Roth IRA given the income limitations.

It is important to note however, that the growth on after-tax contributions is tax-deferred (like Traditional/Rollover IRA funds). Although some plans allow the earnings to be rolled over to a Traditional/Rollover IRA separately from the after-tax contributions, resulting in no income tax on the rollover, this is not always the case. It is important to make sure that your plan has certain provisions and allows for flexibility in the future regarding rollovers.

There are additional nuances and considerations before making after-tax contributions. If this is something you would like to consider, we recommend speaking with your Modera Team and tax professional to determine if after-tax contributions are right for you and if your plan permits them.

IRA Contribution Limits Remain Unchanged

In addition, the limit on annual contributions to IRA and Roth IRA accounts remains at $6,000 for 2021. Individuals age 50 and over are permitted to make an additional catch-up contribution for $1,000. Although these limits have not increased since 2019, IRAs remain another retirement savings vehicle for those wishing to maximize their retirement savings.

Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, individuals can contribute to traditional IRAs at any age, as long as they have earned income. Previously, individuals could not contribute to traditional IRAs beyond age 70.5. There are income phase-outs that still apply to the tax-deductibility of traditional IRA contributions and other nuances, so we recommend discussing these
contributions with your Modera Team.

Coordinate Your Contributions with your Financial Plan

There are other important factors not covered in this article that should be considered, including contribution type (pre-tax, Roth, after-tax) and eligibility for tax-deductible contributions. We can explain the nuanced rules, various options, and help you determine how retirement plans or IRA accounts fit into your overall
financial plan. If you’d like to discuss your retirement plan contributions, please contact us.

Modera Wealth Management, LLC (“Modera”) is an SEC-registered investment advisor with places of business in Massachusetts, New Jersey, Pennsylvania, North Carolina, Georgia and Florida. Modera may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. SEC registration does not imply any level of skill or training.  For information pertaining to our registration status, fees and services, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov) to obtain a copy of our disclosure statement set forth in Form ADV Part 2A. Please read the disclosure statement carefully before you invest or send money.

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