Planning for your retirement is the key to fully enjoying the fruits of your labor. Whether you have an IRA (individual retirement account), a 401(k) or any other kind of retirement account, you want to get the most out of it by putting the most into it. Understanding the contribution limits put in place by the IRS will help you maximize your savings.
Since most retirement accounts are tax-advantaged, meaning that they are not subject to taxation, they are a great way to secure your income. In order to combat earners from placing all of their saved income into retirement accounts and therefore avoiding paying taxes, the IRS has put limits on retirement account contributions.
Every year the IRS updates contribution limits to account for inflation. Staying up to date with all information regarding retirement accounts can be the difference between pinching pennies and living large. Let’s take a look at various retirement plan contributions limits for 2021.
401(k)s are the most common retirement accounts for employees earning a salary, having replaced the standard pension decades ago. They are made up of investments such as stocks and bonds. Typically, a 401(k) is not taxed on its earnings until withdrawn during retirement. Roth 401(k) accounts, on the other hand, typically offer tax-free withdrawals.
In 2021, the amount an employee can contribute to their 401(k) will remain the same from 2020 at $19,500. The “catch up” amount of $6,500 for those over 50 is also unchanged. The total contribution limit from employers and employees combined will be raised by $1,000 to $58,000.
While it might not seem like much, the $1,000 increase could have some benefits particularly for those who are self-employed. Whereas most employers match the amount put into a 401(k), the self-employed can exceed that amount at their discretion. Small business owners will also benefit by maximizing their own 401(k) contributions by an additional $1,000.
In most cases, your employer has to be very generous to exceed the amount that you put into your 401(k). However, you can maximize your contribution by putting as much as you can into your account which your employer will then match.
For those over 50 years old, the contribution limit will be a total of $64,500 due to the addition of the $6,500 catch up amount.
Since many 401(k) contributions are made through direct salary deductions, it is important to speak with your employer regarding your contribution amount. While it is crucial to save for your retirement, you never want to sacrifice your well-being today. A financial advisor can help determine how much you can afford to save.
Just like 401(K)s, IRAs are usually made up of a variety of investments including stocks and bonds, as well as other valuable assets. IRAs are what are called tax-advantaged accounts.
In 2021, the contribution limit for traditional and Roth IRAs remains at $6,000, unchanged from 2020. The catch-up amount is also the same at $1,000 for those over 50 years old. That brings the total to $7,000 for savers 50 and up.
Having different retirement savings plans will go a long way toward securing your golden years. Check out this article here for more information regarding the different ways to save for retirement.
For small business owners and the self employed, a SIMPLE IRA has a lot of benefits. Like a 401(k), employers contribute to their employee’s SIMPLE IRA as does the employee. The IRS will not change the contribution limit from 2020, and it will remain at $13,500. The catch-up amount is still at $3,000.
When using a SIMPLE IRA, employers are not permitted to offer any other type of retirement account. If you are a small business owner, discuss the benefits of each retirement account with a financial advisor in order to figure out which one would work best for your business and your employees.
Employees who are offered a SIMPLE IRA retirement plan should discuss with their employer how much of their salary they wish to contribute to the retirement plan. A financial advisor can also help employees make a financially sound decision regarding this investment.
While most of the retirement plan contribution limits are unchanged from the previous year, 2021 offers enough food for thought on what kind of retirement plan would be best for you. If you are a business owner of any size, figuring out which retirement plan offers the highest degree of benefit to your employees is a nice perk.
Take the new contribution limits into account and share them with your employees. They will want to know the changes so that they can use their judgment on how to best prepare for retirement.
Discuss the limit adjustments with a financial advisor and figure out how the changes could affect your business. You do not want to lose out on retirement savings, so staying up to date will allow you to best prepare for your future.
When it comes time to enter your retirement, take care to discuss the transition with your financial advisor so that it does not overwhelm you. Click here to learn more about ways to transition into retirement.
Whatever your financial situation, experience or knowledge, NextGen Wealth is here to help. We have helped many clients make better sense of their financial situation and prepare for a better, brighter future.If you have any questions, give us a call at 816-287-4780 or contact us here. Understanding your financial security doesn’t have to be confusing. We have the expertise to help you out wherever you are on your journey.
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