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3 Things to Know about 401k Contribution Limits of 2021 and After

by Miles Austine
in Finance, Tips and Tricks
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When your employer provides a 401k plan, you can effectively save money for your retirement. Though most of the 401k plans allow you automatically set aside a portion of your income, there are a few restrictions on the amount of contribution. According to an article published in Forbes, if you are a self-employed or small business entrepreneur, a solo 401k contribution limit was $58,000 last year. This year, the limit has changed which we will discuss later in this article. 

Every year, generally in the month of October or November, the IRS analyzes and occasionally makes changes to the maximum contribution limits for 401k retirement plans, solo plans, as well as other savings instruments. Read on to learn more. 

1. Basic contribution limits

The fundamental limit in 2021 was $19,500. In 2022, it is $20,555, and the limit incorporates all elective staff pay deferrals and any after-tax payment to a chosen Roth account in a 401k or for that matter a singular Roth 401k plan. 

When you have several 401k accounts, the total payments made to each of these, conventional as well as Roth can’t surpass the $20,500 restriction. Any payment made to other kinds of retirement accounts like IRAs will not impact the 401k contribution. 

Are you more than 50 years of age? If yes, you might have added another $6,500 contribution last year for an entire amount of $26,000. It is $27,000 in 2022. 

2. Contributions on part of the employer

The other greatest advantage of participating in a 401k plan is that your company might contribute to the same too. A majority of employers match staff contributions by including 50 cents or even $1 for each dollar a staff pays. You already know what are the 2021 contribution limits as well as for 2022. 

Companies can choose to make elective contributions despite how much or how little a staff contributes, of course up to specific limits. The common limit in the total company and staff contributions for last year was $58,000 and $61,000 in 2022. There is also an option for 100 percent staff contribution to a 401k plan. For employees aged 50 and more, the basic limit was $64,500 last year and $67,500 in 2022, including an amount of $6,500 catch-up 401k contribution.

3. Limitations for highly-paid workers

If you draw a very fat salary, you will be regarded as a highly-paid worker, however, conditional on rigid contribution limits. This has been done to stop wealthier staff from taking undue advantage of tax benefits related to 401k plans. That is why the IRS employs the actual deferral percentage or ADP to make certain that all workers of each compensation level contribute proportionally to their employers’ 401k plans. 

Conclusion 

When it comes to your workplace 401k plans, it allows you to keep aside a good amount every year as savings for your retirement years. Now that you know about some of the essential aspects of 401k contribution limits, start saving each month for happier days after you retire. Make sure you contribute regularly and know the limits. 

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