Financial Planning

Roth 401(k) Contribution Limits for 2021

The Roth 401(k) contribution limit stayed the same this year. Workers 50 and older can save an extra amount for retirement.

The maximum contribution limit for a Roth 401(k) stayed the same for 2021 as last year. The "catch-up" contribution limit for those who are at least 50 years old also did not increase. Despite this, a Roth 401(k) remains a good option for workers who have access to one through their employer and expect to be in a higher tax bracket when they retire.

Roth 401(k) Contribution Limits for 2021

The maximum amount you can contribute to a Roth 401(k) for 2021 is $19,500 if you're younger than age 50. If you're age 50 and older, you can add an extra $6,500 per year in "catch-up" contributions, bringing the total amount to $26,000. Contributions generally need to be made by the end of the calendar year.

The Roth 401(k) first became available in 2006, and a majority of companies now offer it to employees, according to the Plan Sponsor Council of America. The Roth 401(k), as the name implies, combines features of the tax-friendly Roth IRA and the traditional 401(k).

A Roth 401(k) vs. a Roth IRA and a Traditional 401(k)

As with a Roth IRA, you make after-tax contributions to a Roth 401(k). This won't lower your tax bill now, but it will provide you with income in retirement that is free from taxes. You can make withdrawals from a Roth 401(k) tax-free, and without incurring a 10% early-withdrawal penalty, once you've turned age 59 1/2 and have had the account open for at least five years. (If you retire after holding a Roth 401(k) for only two years, for example, the money must sit for three more years to be fully tax-free, even if you own an older Roth 401(k) account from a previous employer that meets the five-year test.)

And as with a traditional 401(k), there are no income limitations with the Roth 401(k), making it an attractive option for high-earners whose salaries might disqualify them from contributing to a Roth IRA.

You can also sock away thousands of dollars more each year with a Roth 401(k) or a traditional 401(k) than you can with an IRA alone. The annual contribution limit for a Roth IRA is $6,000 for 2021, or $7,000 if you're age 50 or older. You'll be obligated to take required minimum distributions from a traditional 401(k) and a Roth 401(k) once you reach age 72. However, you can avoid RMDs from a Roth 401(k) by rolling over the money into a Roth IRA, which doesn't require minimum distributions.

How Much Should You Save in a Roth 401(k)?

Many employers match employees' 401(k) contributions up to a certain percentage of salary. Note that any employer contributions to a Roth 401(k) will be made pretax and will grow tax-deferred alongside your own Roth contributions. When you withdraw money, you will owe income tax on the employer match.

Melissa Brennan, a certified financial planner in Dallas, recommends that people save at least 15% of their income for retirement, including any employer match. If your employer contributes, say, 2%, then you would need to save an additional 13%.

"Every year, add another percentage point until the employee deferrals and the employer contributions reach a total of 15% of gross income," Brennan says. So if you're saving 3% now, bump that up to 4% next year, 5% the year after and so on.

Is a Roth 401(k) Right for You?

Stuart Ritter, a certified financial planner with T. Rowe Price, says Roth 401(k) plans are most beneficial for workers who don't anticipate that their tax bracket will decrease in retirement. This "usually includes younger people who expect their income to increase as they get older," Ritter says.

Brennan also recommends a Roth 401(k) for younger workers. If and when income increases substantially and their tax bracket is higher than it will likely be in retirement, it might make sense at that point to switch to pretax deferrals in a regular 401(k), she says.

(Note: If you invest in both a Roth 401(k) and a traditional 401(k), the total amount of money you can contribute to both plans can't exceed the annual maximum for your age, either $19,500 or $26,000 for 2021. If you do exceed it, the IRS might hit you with a 6% excessive-contribution penalty.)

Roth 401(k) Retirement Savings Tips

Advice for maximizing your Roth 401(k) account:

  • Max out your contributions. For each year that you're able, aim to hit the $19,500 limit.
  • Once you turn 50, add another $6,500 to that limit annually while you continue to work.
  • If your employer offers to match your contributions up to a certain amount, be sure to invest at least that much in your Roth 401(k) each month. It's free money, after all.

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