401(k) plans are an excellent way to save for retirement, but because 401(k)s are tax-advantaged, the IRS sets a contribution limit on how much you — and your employer — can put into your 401(k) per year.
The maximum you can put into a 401(k) in 2021
If you’re under age 50, your maximum 401(k) contribution is $19,500.
If you’re 50 or older, your maximum 401(k) contribution is $26,000 because you're allowed $6,500 in catch-up contributions.
For 2021, your total 401(k) contributions — from yourself and your employer — cannot exceed $58,000 or 100% of your compensation, whichever is less.
Employers who match employees' 401(k) contributions often do so between 3% and 6% of the employee's salary. So if you make $50,000 and contribute 5% of your salary ($2,500) and your employer matches that full 5%, you'll add $5,000 to your balance each year.
Can I contribute 100% of my salary to my 401(k)?
It depends on what your salary is. The maximum individuals can contribute is $19,500 for those under 50 or $26,000 for those 50 or older.
Are there separate limits for Roth 401(k)s?
No. Roth 401(k)s have the same contribution limit as regular 401(k)s. For 2021, that limit is $19,500. You can contribute to both a traditional 401(k) and a Roth 401(k) account in the same year, as long as your total contributions don’t exceed that amount. If you’re choosing between the two, learn about the differences between a Roth and traditional 401(k).
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Are there income limits for 401(k)s?
While there's not a universal income limit on 401(k) contributions, in some cases the IRS does impose contribution limits on "highly compensated employees" when a company encounters disproportionate contribution levels among its workers. The IRS has a test that helps employers who sponsor 401(k) plans assess whether employees are participating in their plan at levels proportionate to their compensation.
If the test determines that people across compensation levels aren't participating in a manner the IRS deems proportionate, employee contribution levels for highly compensated employees can be lowered. In these cases, your employer may need to return some of your excess contributions.
The IRS defines a highly compensated employee in one of two ways:
An individual who either owned more than 5% of the interest in a business at any time during the year or the preceding year, no matter how much they were paid.
An individual who received over $130,000 from the business in the preceding year and, if the employer ranks employees by compensation, was in the top 20%.
Can I have a 401(k) and an IRA?
Yes. IRAs make a great supplement to retirement savings in addition to a 401(k) if you’re contributing enough to receive a full match from your employer, or you’re planning on maxing out your 401(k). If you don’t receive a match on your 401(k) or it has narrow investment options or high fees, it may be a good idea to invest primarily in an IRA. The annual contribution limit for an IRA in 2021 is $6,000, or $7,000 if you’re 50 or older.
» Ready to try an IRA? Check out our list of the best IRA accounts
What happens if I exceed my 401(k) limit by mistake?
If you contribute too much to your 401(k) and notice your mistake before April 15, you can probably correct it with your employer. You’ll need to notify your plan administrator. They’ll return the excess money to you, and you’ll get a new W-2 and pay taxes on your new total taxable wages.
If you don’t catch the mistake before tax day, you may have to pay taxes twice on the amount you contributed over the limit. That’s because the excess contribution can’t be deducted from your taxes in the year it was made, and because the IRS will still count that money as taxable when it’s distributed too.