In this video, I answer the question, “how much can I contribute to my 401(K)?” First, I explain how the 401k works and a comparison to the Roth IRA. Then I talk about a few of the 401(k) retirement rules. After, I show a w-2 form so you can see how the 401k reduces your taxes but is still subject to social security and Medicare taxes. Lastly, I explain how the matching contributions work and go through a few examples of how the 401k reduces your taxes.

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How Much Can I Contribute to My 401(k)?

A 401(k) retirement plan is a popular choice for many individuals looking to save for their future. It offers several benefits, such as tax advantages and employer matching contributions, making it an attractive option for building a substantial nest egg. However, one question that often arises is: How much can I contribute to my 401(k)?

The Internal Revenue Service (IRS) sets annual contribution limits for 401(k) plans. These limits may vary from year to year, and it’s essential to stay informed about the current regulations to maximize your contributions effectively. As of 2021, the 401(k) contribution limits have been set at $19,500 for individuals under the age of 50. If you are 50 or older, you are eligible to make an additional catch-up contribution of $6,500, bringing your total contribution limit to $26,000.

It’s important to note that these limits represent the maximum amount you can personally contribute to your 401(k) plan in a given year. However, employer contributions are not subject to these limits, meaning that the total amount contributed to your account can exceed these thresholds.

Employer matching contributions are an excellent opportunity for employees to maximize the benefits of their 401(k) plans. An employer match often represents a percentage of your salary that your employer contributes, typically up to a specified percentage of your own contribution. For example, if your employer offers a dollar-for-dollar match up to 5% of your salary, you should aim to contribute at least 5% of your income to your 401(k) to receive the full match.

Let’s consider an example to better understand the concept. If your annual salary is $60,000, and you contribute 5%, or $3,000, to your 401(k), your employer will match the same amount, resulting in a total contribution of $6,000 to your retirement account. Taking full advantage of employer matching contributions is crucial since it effectively doubles your investment without any additional effort on your part.

It’s worth noting that individuals with high incomes may face additional limitations due to what is called the “annual compensation limit.” For the year 2021, this limit has been set at $290,000. This means that even if you are eligible to make the maximum personal contribution of $19,500 or $26,000 (if 50 or older), the annual compensation limit may restrict the percentage of your salary that can be contributed to your 401(k).

In conclusion, the maximum amount an individual can contribute to their 401(k) plan in 2021 is $19,500, or $26,000 for those aged 50 and older. However, this only represents personal contributions and does not include employer matching contributions. It’s crucial to take advantage of employer matches to increase your savings effectively. Additionally, individuals with high incomes need to be aware of the annual compensation limit, which may restrict the percentage of their salary that can be contributed. By staying informed about these limits and making the most of employer matches, you can work towards building a secure future through your 401(k) retirement plan.