401k Max Contribution 2021
Learn about employee, catchup, and employer contributions
The 401k max contribution amount that an employee can make to their 401k in 2021 is $19,500. Though, there are some considerations around this number and a potential way to increase it with catchup contributions. There are also employer contributions to consider; especially matching contributions if you want to take full advantage of your 401k. These topics will all be discussed below.
But first, let’s quickly go over what a 401k is. Feel free to skip this section if you’re already familiar with 401ks.
What Is a 401k?
A 401k is a plan organized by an employer that allows employees to contribute some of their wages pre-tax to their individual 401k accounts (each employee has an account assigned to them where their contributions will be deposited). Employers including self-employed individuals may also make contributions to the plan.
Contributions made to each individual's account and all earnings on those contributions (e.g., investment income) are tax deferred until distributions are eventually made at retirement age or potentially sooner in some cases. See our article on the age to withdraw that covers distributions in much more detail if interested: 401k Age to Withdraw
With that quick overview out of the way, let’s move on to the different types of contributions applicable to 401ks.
Employee Elective Deferrals
A contribution that you as the employee chose to make/defer from your earnings before tax is known as an elective deferral. The max elective deferrals you can make in 2021 can be no more than $19,500.
If you are employed by more than one employer and subsequently have more than one 401k plan, then the $19,500 limit is still the max for all elective deferrals to the individual accounts combined. This means that you can’t get around the elective deferral limit by participating in multiple 401k plans.
As an example, say that Joe, 25, is employed by two separate companies and is a participating in a 401k for the first employer and another 401k for the second. Joe’s elective deferrals to the first 401k account are $19,500. Joe will not be able to make any elective deferrals to the second 401k account since the max amount was reached with the first 401k account.
You may have noticed that age was referenced in the above example. You’ll see why age is important in the next section on catchup contributions.
Employee Catch-Up Contributions
If a 401k plan allows it, catch-up contributions may be made if 50 or over. The max contributions that can be made can be no more than $6,500. The key point here is if the 401k plan allows it. Not all do.
Though, if you are participating in multiple 401k plans and the plans do not support catch-up contributions, then you can still make contributions where the total between the plans is $26,000 (total elective deferral of $19,500 + $6,500 in catchup contributions). So, there is a potential workaround in this scenario for those savvy to the 401k rules.
An employer may make contributions to their employees’ individual 401k accounts in a number of ways depending on how the plan is setup. That said, there are two main contribution types that an employer can choose from: matching and nonelective.
With matching contributions, the employer will match, either fully or partially, a certain percentage of the given employee’s elective contributions. For example, a company may match 100% on the first 3% that an employee contributes. This means that if my compensation is $1,000 and I contribute 3% or $30, then the employer would also contribute $30 making the total contribution amount $60.
As an employee, be sure to contribute at least the match amount to your 401k. Otherwise, you’re missing out on essentially free money.
The second method employers use to contribute is nonelective contributions. Nonelective means that the employer will contribute a certain amount independent of whether or not the employee choses to contribute via elective deferrals. It additionally means that the employee can’t chose to receive this amount as cash – It must go to their 401k.
For example, an employer could choose to contribute 3% meaning that an employee with $1,000 in compensation would receive $30 to their 401k account from the employer.
$290,000 Max Compensation
For both matching and nonelective contributions, the max employee compensation amount that can be considered is $290,000.
For example, say that there are two highly-paid employees where one makes $290,000 and the other $400,000. The 401k plan is configured with nonelective contributions at 1%. Employee 1 will receive $2,900 (1% of $290,000) in nonelective contributions. Employee 2 will also receive $2,9000 in nonelective contributions since anything over $290,000 is excluded.
As mentioned, employers can configure their contribution amounts and contributions methods in a variety of ways. Be sure to read over your 401k plan to see how it is structured; especially if matching contributions are used so that you can be sure to contribute enough to meet the match amount.
The one piece we haven’t yet discussed is the max amount that an employer can contribute to their employees' individual accounts. It's best to describe this piece in the context of combined employer and employee contributions, which will be overviewed next.
Combined Employer and Employee Contributions
The max amount that can be placed into an employee’s 401k account annually is the lesser of:
- 100% of the employee’s compensation.
- $58,000 if under 50 and $64,500 if 50 or over and catchup contributions are allowed.
The amount above is for both employer and employee contributions. This means that for an employee under 59 who contributes their max elective deferral amount of $19,500, the employer could at most contribute an additional $38,500. If over 50, then the employer's max contribution amount in this scenario would be the same but the employee would be able to make an additional $6,500 contribution for a total amount of $64,500.
It’s important to note here that while an employee’s elective deferral amount across all their 401ks combined can’t be more than $19,500 or $26,000 with catchup contributions, the $58,000 amount is per 401k plan account.
For example, say that Jane, 30, works for two separate employers and has two 401k plans. Both plans have a nonelective contribution amount of 3%. Jane decides to make the max elective deferrals amount of $19,500 to her 401k under employer 1. Employer 1 also makes $38,500 in contributions to this account with the total contribution amount at the max of $58,000.
Since Jane contributed the max elective deferrals amount of $19,500 to the first 401k account, she cannot make any elective deferrals to the second 401k account. But, employer contributions are still allowed to the second retirement account since the $58,000 limit is per 401k account. This means that total 401k contributions across the 401k plans Jane is participating in will be over $58,000 for the year.
What If I Contribute Too Much?
If you contribute too much for the year, then the excess amount cannot be excluded from income taxes for the year you contributed in. For example, an individual under 50 makes $20,000 in elective deferrals. Since $19,500 is the max elective deferral amount, the excess $500 cannot be excluded from income taxes for the year.
If the excess is withdrawn by April 15th of the following year, then the only additional taxes that will need to be paid in that year are income taxes on any earnings on the excess amount (e.g., interest earnings, investment earnings, etc.). No penalties will be imposed.
If the excess amount is not withdrawn by April 15th, then you'll still need to remove the excess amount or the 401k plan could be disqualified for not following the rules. Additionally, when the excess amount is distributed, it will again be treated as income and included for income taxes for that year. So, you could end up paying income tax on the excess amount twice: once in the year the excess amount was contributed and once in the year the excess amount was distributed from the 401k.