What Is the Change to the Maximum 401(k) Contribution for 2021 for Over 50?
Dylan Telerski / 16 Jun 2021 / Business
If you are turning 50 in the 2021 calendar year or you’ve hit this milestone already, you can save a maximum of $26,000 in your tax-advantaged 401(k) plan. Participants 49 and under are only allowed contributions totaling $19,500.
If you’re getting close to retirement and looking for a way to save a little extra this year, the news is good. There is a special “catchup” provision that allows retirement savers over 50 to put away $6,500 extra in 2021 over the standard maximum.
How Much Can a Person Over 50 Contribute to a 401(k) in 2021?
While the catchup contribution allowance remains a fixed $6,500 in 2020 and 2021, this amount does tend to jump in $500 increments every three to five years. From 2000-2006, the catchup contribution increased by $1,000 every year.
The catchup contribution is a helpful savings tool, assuming that Americans may not have been so diligent about funding their retirement accounts when they were younger and earning less. Saving the $6,500 catchup from 50 to 65 can potentially result in an extra $50,000 to $100,000 in total savings.
What Changed in 401(K) Limits From 2020-2021?
The thresholds for maximizing traditional IRAs, Roth IRAs, and the Saver’s Credit all increase in 2021, as does the maximum employer/employee contribution.
Here’s where someone over 50 can benefit, particularly high earners:
- The phase-out range for a traditional IRA increased from $65-75K in 2020 to $66-76K in 2021. If a married couple files jointly and the spouse is covered by a retirement plan, the phase-out range is $105-125K, up from $104-124K in 2020. For a married couple filing jointly where the spouse is not covered by a retirement plan, the range is $198-208K, up from $196-206K in 2020.
- People saving with a Roth IRA are subject to contributions based on income. Participants with an adjusted gross income less than $125,000 (single) or $198,000 (married/joint) are eligibile for the $6,000 maximum contribution in 2021. An extra $1,000 can be contributed by participants who are over 50.
- The Saver’s Credit threshold for low and moderate income workers is $66,000 for married couples filing jointly (up from $65,000 last year) or $49,500 for head-of-household filers (up from $48,750), and $33,000 for singles or married filing separately (up from $32,500).
- The employer/employee maximum, also the Solo 401(k) maximum, increased from $57,000 to $58,000.
Who Is Considered a ‘High Earner’ or ‘Highly Compensated Employee’ in 2021?
If you’re participating in a small business 401(k), your earning status may determine the maximum you can contribute to your 401(k).
In 2021, a Highly Compensated Employee (HCE) is defined as:
- Someone owning 5% or more of the company.
- Someone earning at least $130,000 (up from $125K in 2020) from the business.
- Someone who ranks in the top 20% of highest-paid workers in the company.
- A spouse, child, grandparent, or parent of someone who owns 5% or more of the same company.
If you’re an HCE in your fifties, you’ll be limited by your plan’s HCE maximum. Generally speaking, contributions made by HCEs cannot be “excessive” when compared to those of non-HCEs. For instance, if the average plan contribution by non-HCEs is 4%, then the most an HCE can contribute is 6%. So, say you make $150,000 and want to max out your contribution at $26,000. You may find the most you can contribute is $9,000 (6% of your salary). If you contribute too much, the excess will be refunded to you, and you’ll have to pay taxes on that amount. The purpose of 401(k) contribution limits for high earners is to ensure that the 401(k) plan does not unfairly discriminate against the average worker. There are ways around this limit – for instance, you may switch to a Safe Harbor plan and make employer contributions to all plan participants.
Contact Ubiquity to learn more about setting up a 401(k) for your small business. We provide low-cost, easy-to-manage retirement plans to help employers and employees reach their savings goals.