The 401(k) and IRA Maximum Contribution Limits for 2021

Saving independently for retirement is a good way to ensure that you don’t wind up cash-strapped once your career comes to an end and you’re left to rely heavily on Social Security to pay the bills. And knowing how much you’re allowed to contribute to a retirement plan each year can help you establish a savings strategy that works to your advantage once your time in the workforce is over.

There are several tax benefits associated with saving in an IRA or 401(k). With a traditional IRA or 401(k), your contributions go in tax-free, thereby exempting a portion of your income from taxes. Put $1,000 into one of these accounts, for example, and that’s $1,000 of earnings the IRS won’t tax you on. Traditional IRAs and 401(k)s also allow for tax-deferred investment growth, which means that when your investments in your account earn money, you’re not taxed on those gains year after year like you are in a regular brokerage account.

Meanwhile, Roth IRAs and 401(k)s offer their own benefits, too. Though contributions don’t go in tax-free, investment gains are tax-free, and withdrawals in retirement aren’t subject to taxes. Roth IRAs are also the only retirement savings plans that do not impose required minimum distributions.

It’s for these reasons that it really pays to fund an IRA or 401(k) in 2021, so let’s review the contribution limits savers have to work with.

Traditional and Roth IRA contribution limits for 2021

IRA contribution limits for traditional and Roth accounts in 2021 will be the same as 2020’s. If you’re under 50, you can put in up to $6,000 in 2021. If you’re 50 or older, you get a $1,000 catch-up that raises this limit to $7,000.

That said, the income limits for contributing to a Roth IRA are increasing from 2020. In 2020, direct Roth IRA contributions were barred for:

• Single tax filers and heads of household earning over $139,000.
• Joint filers earning over $206,000.
• Married couples filing separately earning over $10,000.

In 2021, these thresholds are:

• $140,000 for single tax filers and heads of households.
• $208,000 for married couples filing jointly.
• $10,000 for married couples filing separately (unchanged from 2020).

If you earn too much money in 2021 to contribute to a Roth IRA directly, there’s always the option to fund a traditional IRA and then convert it to a Roth account afterward. You’ll pay taxes on the money you move over, but you’ll then get to enjoy the many benefits Roth IRAs offer. You can also convert a Roth 401(k) to a Roth IRA, and since both have the same tax treatment, you won’t be hit with taxes on the amount you move over. 

Furthermore, while there are no income limits for contributing to a traditional IRA, there are income limits for tax-deductible contributions if you’re covered by another workplace plan like a 401(k). In 2021, these limits are:

• $76,000 for single filers and heads of household (up from $75,000 in 2020).
• $125,000 for married couples filing jointly (up from $124,000 in 2020).
• $10,000 for married couples filing separately (no change from 2020).

If you don’t have a workplace retirement savings plan but your spouse does, these income limits will apply:

• $206,000 for married couples filing jointly (up from $206,000 in 2020).
• $10,000 for married couples filing separately (no change from 2020)

Traditional and Roth 401(k) contribution limits for 2021

The contribution limits for 401(k)s aren’t changing from 2020 to 2021. Rather, they’re holding steady at $19,500 for workers under 50, while those 50 and over retain the $6,500 catch-up opportunity that brings their total allowable contribution to $26,000. These limits also apply to 403(b)s, most 457 plans, and the federal government’s Thrift Savings Plan.

Now it may be possible to get more money into your 401(k) in 2021. If your employer offers any type of matching program, those contributions won’t count toward your annual limit. Or, to put it another way, if your employer gives you $3,000 in matching dollars for your 401(k), you can still put in your full $19,500 or $26,000, depending on your age.

That said, the overall limit for 401(k) plans is increasing to $58,000 in 2021, but that limit won’t apply to everyone. Rather, it applies to those whose employers allow for after-tax salary deferrals in a 401(k), as well as those entitled to fund a solo 401(k) or SEP IRA, which we’ll discuss below. That $58,000 limit on after-tax 401(k) contributions includes the $19,500 you can defer pre-tax from your salary, as well as any employer contributions to your 401(k). Catch-up contributions, however, fall outside this limit, as you’ll see below when we talk about solo 401(k)s. 

SIMPLE IRA contribution limits for 2021

The Savings Incentive Match Plan for Employees (or SIMPLE) IRA is a special IRA designed for small businesses. The contribution limits for SIMPLE IRAs isn’t changing from 2020 to 2021, which means workers under 50 can put in up to $13,500, while those 50 and over get a $3,000 catch-up that brings their total to $16,500.

SEP IRA and solo 401(k) contribution limits for 2021

Those who are self-employed get the option to save in a Simplified Employee Pension (or SEP) IRA or a solo 401(k). The limits for these retirement plans are increasing by $1,000 over 2020’s limits. For 2021, they’ll be $58,000. Furthermore, while SEP IRAs don’t offer catch-up contributions since they’re funded on the employer side, the $6,500 catch-up contribution that applies to traditional and Roth 401(k)s applies to solo 401(k)s as well. This means that if you’re 50 or older, you can max out your solo 401(k) in 2021 at $64,500.

The Saver’s Credit

The Saver’s Credit is a tax credit that low and moderate earners can claim for making retirement plan contributions. The credit pays up to 50% of the first $2,000 in contributions you make (if you’re a couple filing jointly, that’s per person, so you may be eligible for 50% of up to $4,000 in contributions, or a $2,000 credit).

Here’s what the income limits for the Saver’s Credit look like in 2021:

• $33,000 for single tax filers and married couples filing separately (up from $32,500 in 2020).
• $49,500 for heads of household (up from $48,750 in 2020).
• $66,000 for married couples filing jointly (up from $65,000 in 2020).

Know your 2021 retirement plan contribution limits

The more money you put into a retirement plan in 2021, the more tax savings you’ll reap. Not only that, but maxing out your retirement plan will put you in a stronger position to comfortably afford your senior years. Here’s a summary of what 2021’s contribution limits look like:

Data source: IRS.

You may not be in a position to max out your retirement savings plan in 2021. If so, your next best bet is to save as much as you can with the goal of ramping up your contribution rate as your financial picture improves. Putting some money into your 2021 retirement plan is far better than contributing nothing at all.