For many Americans, workplace 401(k) programs have become one of the most popular methods of investing. Trillions of dollars are currently held in 401(k) accounts throughout the country, and many investors are constantly looking for ways to maximize the growth of their 401(k) account balances.
But like most tax-advantaged retirement accounts, investors can’t plow an unlimited amount of money into their accounts. Because 401(k) contributions are normally made before taxes, they reduce an investor’s taxable income. And while the government wants to stimulate some retirement savings, it doesn’t want to encourage complete evasion of income taxation.
It’s important to remember that 401(k) limits are roughly indexed to inflation and can change every year. Rather than set it and forget it, investors in 401(k) accounts need to stay on their toes and keep themselves apprised of 401(k) changes at the beginning of each year.
If you want to learn more about 401(k) limits, 401(k) changes in 2021, and how these changes will affect your retirement accounts, keep reading to find out more.
What Is a 401(k) Limit?
There are two types of 401(k) limits: contribution limits and income limits – and each of these is important to consider.
401(k) Contribution Limits
Most investors are going to concern themselves with 401(k) contribution limits. There are limits to how much money you can contribute to your 401(k) account each year, as well as limits to how much your employer can contribute to your 401(k). These limits can change every year depending on changes to the cost of living.
401(k) Income Limits
401(k) accounts were intended to benefit middle-income workers, so those deemed to be too “rich” to need help receive less of a benefit. As with 401(k) contribution limits, these income limits, or more precisely, compensation limits, can also change from year to year.
2021 401(k) Limits
For 2021, the 401(k) contribution limit is staying the same as 2020 at $19,500. That means that you can place a maximum of $19,500 into your 401(k) account. Those over age 50 are allowed a special 401(k) catch-up contribution, allowing them to boost their retirement savings if they hadn’t started saving for retirement until later in life. That 401(k) catch-up contribution is also remaining the same in 2021, at $6,500. So if you’re over age 50, you can place a maximum contribution of $26,000 into your 401(k).
Employer 401(k) contributions don’t count against your 401(k) contribution limit, but there is a combined limit for employer and employee contributions. That 401(k) contribution limit is increasing to $58,000 in 2021, up from $57,000 in 2020. For those over age 50, that combined 401(k) contribution limit increases to $64,500 from $63,500, to take into account the catch-up contribution limit. These are important figures to keep in mind for those working for companies that offer matching 401(k) contributions.
Let’s look at a couple of examples. Worker 1 makes $100,000 a year and elects to put 6% of his salary into a 401(k). His employer offers a 1:1 401(k) matching contribution, so he gets an additional 6% in free money into his 401(k) account. His total combined employer and employee contribution is $12,000, so he’s well under the limit.
Now let’s look at Worker 2, who makes $150,000 a year and elects to max out with a lump sum of $19,500. His employer offers a 2:1 matching contribution, contributing $2 for each $1 of employee contribution. That would put the total contribution up to $58,500, which is above the legal limit. So either Worker 2’s employer needs to contribute less, or Worker 2 needs to reduce his employee 401(k) contribution to $19,333 to take advantage of the fullest extent of his employer’s contribution.
The 401(k) compensation limit for 2021 has risen to $290,000, up from $285,000 in 2020. For example, if you have total compensation of $500,000 in 2021, you elect to max out at $19,500, and your employer offers an automatic 5% match, your employer would only contribute $14,500, since that is 5% of $290,000. Your additional $210,000 of compensation isn’t eligible for 401(k) contributions.
Obviously there are very few people who have to pay attention to these compensation limits, but those who are near those limits do need to be aware that they exist.
How to Diversify Your Portfolio
One of the common complaints about 401(k) plans is the limited number of investment options they offer. While some may be fortunate enough to work for companies that offer dozens of investment choices in 401(k) plans, many are not. They’re tied to 401(k) investment options that minimize cost to their employer, or that are easy to manage, not those that necessarily offer the best return to investors. And most 401(k) investment options are completely dependent on the well-being of Wall Street for their performance, meaning that investors looking to protect their retirement savings in the event of a market crash may have no place to turn.
That’s why many investors who want to protect their retirement savings turn to alternative investments to protect their 401(k) assets. And with the ability to roll over assets from a 401(k) to an IRA, the number of options available for investment can increase exponentially.
One popular investment option is a gold IRA. A gold IRA allows investors to invest in physical gold coins and bars, while still enjoying the same tax treatment as a conventional retirement account. If you have 401(k) assets that you want to protect, you can roll over some or all of those assets into a gold IRA without tax consequences.
That gives you the benefits of investing in gold, such as protection against inflation, growth potential during weak economic times, and diversifying your investment portfolio, while still keeping your money in a tax-advantaged account. When it comes time to take a distribution from your gold IRA, you can choose to take that distribution in cash or in gold, allowing you to continue to own gold and benefit from the protection it offers even after you can no longer hold gold in a tax-advantaged account.
If you’re interested in investing in gold to diversify your retirement savings and protect your wealth against another Wall Street crash, call the experts at Goldco today to learn more. With years of experience helping investors just like you protect their retirement assets with gold, Goldco’s representatives can help you make an informed decision about investing in gold.
Don’t let your retirement savings go another day without a plan to protect them. Contact Goldco today to start safeguarding your financial future.