401(k) contribution limits are adjusted and updated by the Internal Revenue Service every year. The agency sets a limit on 2021 401(k) contributions to prevent highly compensated employees from benefitting more than an average compensated worker.
The base contribution limit applies to the employee contributions. If you’re working for an employer where the employer matches your contributions, the total contributions can be more than contribution limit.
Catch-Up Contribution Limit
For the 2021 year, the IRS increased the 401(k) contribution limits to $20,000. With the catch-up contribution, an employee can contribute $6,500 more additionally. This totals the contribution limit at $26,500.
Those who are aged 50 and over can benefit from the catch-up contribution. Regardless of how much you’ve contributed to your 401(k) in the past, you can take advantage of the catch-up contribution and invest more in your retirement.
Without catch-up contribution, the limit is $20,000.
With the catch-up contribution, the limit is $26,500.
Traditional and Roth 401(k) Contribution Limits
The contribution limits apply to everyone regardless of the type of 401(k) they have. All workers can contribute up to the contribution limit set by the IRS. With that said, the type of the 401(k) retirement account doesn’t affect the contribution limits.
The difference between a traditional and a Roth 401(k) is the taxes. Those who have a traditional 401(k) aren’t taxed when contributing money. This is due to how the 401(k) is funded. Traditional 401(k) and other qualified plans are funded with pretax dollars.
On the other hand, Roth 401(k) contributions are made with after-tax dollars. The traditional 401(k) contributions qualify as a deduction. The Roth 401(k) contributions are taxed. This has to do with how the retirement account is funded.
This is as far as the contributions are concerned. The real difference comes when it’s time to withdraw money. The withdrawals from a traditional 401(k) are taxed but Roth 401(k) contributions aren’t taxed.
This can be both a good and a bad thing depending on how much you earn currently and in retirement. Those who are likely to earn more in retirement should go for a Roth 401(k). This is because you are most likely to move to a higher tax bracket and wouldn’t want to lose more of your money.