As was widely expected, 401k contribution limits will not increase in 2021, the Internal Revenue Service (IRS) announced on Monday. But hey, they won’t go down either, which was a slight possibility.
For 2021, 401k contribution limits, which are based on cost-of-living adjustments, will remain at $19,500 for individuals, and catch-up contributions for those 50 or older are allowed an additional $6,500.
The same limit also applies to 403b plans, most 457 plans and the government Thrift Savings Plan.
The IRS’s bulletin also revealed cost of living adjustments for a wide range of other retirement savings vehicles. SIMPLE retirement accounts will also stay at their current savings limit of $13,500, and the amounts that can be contributed to IRAs and Roth IRAs have also remained unchanged from the 2020 limits at $6,000, with a $1,000 catch-up limit for those 50 or older.
Though the contribution limits remain largely unchanged, the IRS did announce the income ranges to be eligible to make Roth IRA contributions will increase next year. The income phase-out range for singles and heads of households will be $125,000 to $140,000. For married couples filing jointly, it will be $198,000 to $208,000.
While there was some concern that 401k and catch-up contribution limits could fall by $500 each in 2021 due to deflation, most experts said all along there was little chance of the contribution limits actually increasing for next year.
While Social Security benefits have a “hold harmless” rule to ensure that recipients don’t receive less from year to year due to inflation or increases in Medicare Part B premiums, there is no such rule for 401k or IRA contribution limits. The inflation adjustment and rounding rule only compares with the base year, so it doesn’t matter what the limit was in the previous year.
Of course, as those in the industry know, maxing out 401k contributions isn’t an issue for the vast majority of plan participants. During 2019, only 12% of the participants in 401k plans administered by Vanguard contributed the then-max of $19,000, and only 15% of participants age 50 or older took advantage of the catch-up contribution to contribute another (then) $6,000.
Plan participants with employers who allow aftertax 401k contributions can also take advantage of a new $58,000 limit for 2021. That’s an overall cap, including the $19,500 (pretax or Roth in any combination) salary deferrals plus any employer contributions (but not catch-up contributions).
More details on the 2021 401k contribution limit and other retirement-related cost-of-living adjustments for next year are in Notice 2020-79 (PDF).
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