If your employer offers a 401(k) plan, it can be one of the easiest and most effective ways to save for your retirement. But while a major advantage of 401(k) plans is that they let you put a portion of your pay automatically into your account, there are some limits on how much you can contribute.

Each year, usually in October or November, the Internal Revenue Service (IRS) reviews and sometimes adjusts the maximum contribution limits for 401(k) plans, individual retirement accounts (IRAs), and other retirement savings vehicles. On Oct. 26, 2020, the IRS made updates for 2021.

The federal income tax filing due date for individuals has been extended from April 15, 2021, to May 17, 2021. Payment of taxes owed can be delayed to the same date without penalty. Your state tax deadline may not be delayed.

Key Takeaways

  • Employees can contribute up to $19,500 to their 401(k) plan for 2020 and 2021.
  • Anyone age 50 or over is eligible for an additional catch-up contribution of $6,500 in 2020 and 2021.
  • The general limit on total employer and employee contributions for 2020 is $57,000 (catch-up at $63,500) in 2020. In 2021 that amount rises to $58,000 (or $64,500 with the catch-up contribution).

Basic Limits

The basic employee contribution limit for 2020 is $19,500, and this limit includes all elective employee salary deferrals as well as any after-tax contributions made to a designated Roth account within your 401(k) or a special Roth 401(k) plan. 

The same contribution limits apply to 403(b) plans and most 457 plans, as well as to the federal government’s Thrift Savings Plan. All of the basic limits remain the same in 2021.

If you have multiple 401(k) accounts, your total contributions to all of them—both traditional and Roth—cannot exceed that $19,500 limit. Any contributions you make to other types of retirement accounts, such as IRAs, do not affect your 401(k) contribution limit.

To encourage workers nearing retirement to speed up their savings, the IRS allows 401(k) participants ages 50 and over to make additional contributions beyond the standard contribution limit.

If you are age 50 or older, you can kick in an extra $6,500 catch-up contribution in 2020 for a total of $26,000. This amount remains the same in 2021.

Employer Contributions

Another big benefit of participating in a 401(k) plan is that your employer may contribute to it as well. Many employers match employee contributions by adding, for example, 50 cents or $1 for every dollar the employee contributes.

Employers can also make elective contributions regardless of how much or little the employee contributes, up to certain limits. The general limit on total employer and employee contributions for 2020 is $57,000, or 100% of employee compensation (subject to a max of $285,000), whichever is lower. For workers age 50 and up, the base limit is $63,500 ($57,000 plus the $6,500 catch-up contribution).

In 2021, the general limit on total employer and employee contributions is $58,000 and if you are age 50 and up, the base limit is $64,500, which includes the $6,500 catch-up amount.

Limits for Highly Paid Employees

If you earn a very high salary, you may be considered a highly compensated employee (HCE), subject to more stringent contribution limits. To prevent wealthier employees from benefiting unfairly from the tax benefits of 401(k) plans, the IRS uses the actual deferral percentage (ADP) test to ensure that employees of all compensation levels participate proportionately in their companies' plans.

If non-highly compensated employees (NHCEs) do not participate in the company plan, the amount that HCEs can contribute may be restricted.

Contributions in Excess of 2020 Limits

Evaluating your estimated contributions for the year ahead and analyzing your contributions at the end of a calendar year can be very important. If you find that you have contributions in excess of the 2020 limits, the IRS requires notification by March 1, 2021, and excess deferrals should be returned to you by April 15, 2021.

Comparing 2020 and 2021 Limits

The chart below from the Society for Human Resource Management and information from the IRS provides a breakdown of how the rules and limits for defined-contribution plans (401(k), 403(b), and most 457 plans are changing for 2020 vs. 2021.

Defined Contribution Plan Limits 2020 2021 Change
Maximum employee elective deferral $19,500 $19,500 none
Employee catch-up contribution (if age 50 or older by year-end)* $6,500 $6,500 none
Defined contribution maximum limit, all sources $57,000 $58,000 +$1,000
Defined contribution maximum limit (if age 50 or older by year end); maximum contribution all sources, plus catch-up $63,500 $64,500 +$1,000
Employee compensation limit for calculating contributions $285,000 $290,000 +$5,000
Key employees' compensation threshold for nondiscrimination testing $180,000 $180,000 none
Highly compensated employees' threshold for nondiscrimination testing $130,000 $130,000 none

*The catch-up contribution limit for participants age 50 or older applies from the start of the year to those turning 50 at any time during the year. (If you were born on New Year's Eve, you can still take it.)