2021 401(k) Catch Up Contribution Rules

Author: / 28 Jan 2021 / 401(k) Plan Information

401k catch up contributions

In the year you turn 50, you become eligible to put aside more tax-shielded money into your 401(k) plan. The tax deduction for a catch-up contribution can save you more than $1,000 on your annual IRS bill. On top of that, you’ll be earning investment returns and compounding interest on the additional money saved.

If you’ll be hitting that 50 milestone birthday in 2021, now is a good time to ensure your percentage is sufficient to reach the new maximum 401(k) contributions (including the catch-up contribution), so you can maximize your retirement savings.

Are 401(k) Catch-up Contributions Increasing in 2021?

Unfortunately, NO! The 401(k) catch-up contribution limit for Traditional and Safe Harbor plans will remain unchanged at $6,500 for 2021. The regular contribution limit also remains unchanged at $19,500 – which means, if you are turning 50 in 2021, you will be able to save up to $26,000 in a tax-advantaged retirement saving account.

How Much To Save To Maximize a 401(k) in 2021

Nearly all 401(k) plans (98%) permit catch-up contributions, but, according to an analysis by Vanguard, only 15 percent of eligible participants take full advantage.

It can be difficult for the average worker to put away $26,000 into a 401(k) plan. Earners making $100,000 a year would have to save more than a quarter of their pay to take full advantage of the catch-up contributions.

In a nutshell, if you’ll be 50 in 2021, you’d need to contribute $2,166 per month or $541.50 a week into your 401(k) plan.

How Much Can SIMPLE 401(k) Account Holders Contribute As a Catch-up in 2021?

SIMPLE 401(k)s are designed for small businesses with 100 or fewer employees. Employers must contribute to these plans, and employees must be fully vested, but the plans are easy to administer and also are not subject to annual nondiscrimination testing. Employees 50 or older can save an extra $3,000 as catch-up contributions to SIMPLE 401(k) plans. This figure has remained unchanged since 2015.

Are Employer Contributions Going Up in 2021?

One of the benefits of a 401(k) plan is that your employer may also contribute to your retirement savings, either through a match or as a nonelective contribution. On top of the $19,500, your employer can contribute an extra $38,500 to bring your account to a total of $58,000. The 2021 amount has increased by $1,000 from a maximum of $57,000 in 2020. For those 50 or older, who choose to make an additional $6,500 catch-up contribution, that brings a maximum of $64,500 in 2021.

 How Much Can Solo 401(k) Savers Put Away for Retirement?

The employer contribution figures are also important if you have a Solo 401(k) account, as you are contributing as both employer and employee. Here’s another bit of good news for 2021: Solo 401(k) participants can also include their spouses to effectively double their tax-advantaged savings for the year to $116,000 — plus $13,000 if they are over 50 – for total household savings of 129,000 in 2021.

The household can deduct this amount off the taxable income for the year and pay taxes only as you make your 401(k) withdrawal in retirement. Currently, the 401(k) distribution rules do not require you to remove money from your account (as “RMDs,” Required Minimum Distributions) until you are 72 years of age. The longer the cash sits, the more it earns in profits and compounding interest.

Are Catch-up Contributions Allowed in Roth 401(k)s?

YES, you can make the $6,500 catch-up contribution if you have a Roth 401(k) account. You won’t get the immediate tax break that a Traditional 401(k) plan provides, but you also won’t have to pay tax on the investment growth of that extra $6,500/year.

Best of all, this money is 100% yours– without owing tax or penalties if:

  •  You’re at least 59½ years old
  •  You’ve been contributing to the account for at least the previous five year.

These “qualified” withdrawals can also be taken if you become disabled or to your beneficiary after your death.

Do Other Retirement Accounts Allow Catch-up Contributions?

Most 401(k) plans allow catch-up contributions. Additionally, catch-ups are allowed by other types of retirement savings plans, such as:

  • 403b
  • Governmental 457b
  • Roth IRAs

The maximum catch-up contribution allowed for IRAs in 2021 is $1,000 – a figure unchanged since 2006.

Answer a few simple questions to find the optimal plan for you and your small business.

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(just me/or my business partner/spouse)

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Will a 401(k) Catch-up Help You in 2021?

The 401(k) catch-up contribution is based on the premise that most people hit their peak earnings in their fifties. You may not have saved aggressively prior to this point, so the extra dollars come in handy, particularly as you get closer to your golden years.

Here’s an example of how a 401(k) catch-up contribution might work:

  • A couple earning $130,000/year in the 22% tax bracket puts away the standard $19,500 and additional $6,500 catch-up contribution.
  • By saving the maximum, the couple reduces their taxable income substantially and is now in the 12% bracket. The reduced tax rate saves them $5,720 in taxes this year. The catch-up contribution alone produced a tax discount of $1,430.
  • They can also put away $14,000 into a Roth IRA at a 12% rate, paying just $1,680 in taxes to save a bit of tax-free cash for their retirement years.
  • All things considered, the couple will effectively save $40,000 per year from ages 50 to 66 to produce over $1 million by the time they reach full retirement age.

Had the couple opted out of the catch-up contributions, they’d owe an extra $1,870 in taxes each year, which could add up to $50,000 in lost savings once investment returns are calculated. The potential impact is even higher in the upper tax brackets. Most people see decreased annual income after retiring and are taxed at a lower rate.

So, will the 401(k) catch-up contribution help workers over 50 save for a nice retirement? The answer is YES!

Set Up Your 401(k) with Ubiquity

Employers and employees can call upon Ubiquity, a Small Business 401(k) provider, to learn more about setting up a 401(k) plan and maximizing savings. Ubiquity is unique in that we charge a transparent flat rate for service that does not depend upon the Assets Under Management or the number of people covered by the plan. Contact us to learn more.

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© 2024 Ubiquity Retirement + Savings
44 Montgomery Street, Suite 300
San Francisco, CA 94104