Max out your contribution limits.
Do you know what the contribution limits are for your specific type of retirement account? Knowing these limits will help you make the maximum contributions without exceeding those limits and get penalized for over contributing.
Making the maximum contribution allows you to save as much money in your retirement account before you get to retirement age. Adding as much money as you’re allowed will help you save for retirement now so you can retire sooner and contribute to a more stable retirement strategy.
In 2021, you can contribute $19,500 to your 401k. And the total contribution limit for you and your employer combined in 2021 is $58,000.
If you have both a traditional 401k and a Roth 401k, your total contributions can’t exceed the $19,500 limit.
But if you have a traditional 401k with another type of retirement account (like an IRA), the contributions you make to your secondary retirement account don’t count against your 401k limits.
If you have an IRA (whether Roth or traditional) your annual contribution limit is $6,000. This number was the same in 2020 as it is in 2021.
Other Types of Retirement Accounts
There are other types of retirement accounts you can have, like a 403(b) or a 457, but the limitations for the contributions made to these accounts are the same as a 401k. For a spousal IRA, each half of the couple can contribute $6,000, like for a regular IRA, but the funds will be in the same account.
There are also catch-up contributions you can make if you’re over 50 years old. These limits allow you to contribute an additional $6,500 to help you catch up from when you didn't make retirement payments.
What happens if you go over the contribution limit?
If you find that you’ve gone over the contribution limit for your account, you can withdraw those contributions, but you should do it sooner rather than later. If you don’t take out your overcontributions, you’ll likely incur additional taxes for every year the excess money stays in your account.
It’s important to note that while these are the current limitations for each retirement account, these amounts can change each year. Keep up with the current limitations so you can always get the most out of your retirement account.
If you would like more information about the different types of retirement accounts or your overall retirement strategy, contact the office.
Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.