The Tax Deadline to Contribute to Your 401(k) Plan is December 31st
As the end of 2021 approaches there is an important tax-savvy move that you can and should consider by year end.
While contributions to IRAs can be made for the previous year up to the tax-filing deadline of the current year, the tax deductions for 401(k) plan contributions and most other salary-deferral retirement plans apply only to the calendar year. So, contributions to those plans must be made by December 31st.
The limit on employee elective deferrals for 401(k) plans is $19,500 or 100% of your salary, whichever is less, in 2021. Some plans will allow participants who are 50+ at the end of the calendar year to make additional catch-up contributions of $6,500 for the 2021 tax year.
This contribution cap for your retirement savings should be your goal every year if possible. Increasing your contribution rate, even by as little as 1 percent, can make a huge difference in your long-term retirement savings. What seems like a small, insignificant amount today can have a big impact on your account balance 20 years from now.
Employer contribution considerations.
Many employers offer 401(k) matching contributions. With a 401(k) match, your employer matches a portion of your contributions, up to a certain percentage of your salary. In addition to matching contributions, some employers might share a percentage of their profits with employees in the form of a discretionary profit-sharing contribution.
While an employer’s 401(k) match and profit-sharing contributions don’t count toward your $19,500 employee contribution limit (or $26,000 if you are 50 or older), those employer contributions are capped by total contribution limits.
Total 401(k) plan contributions by both an employee and an employer cannot exceed $58,000 in 2021. Catch-up contributions for employees 50 or older bump the 2021 maximum to $64,500 in 2021. Total contributions cannot exceed 100% of an employee’s annual compensation. This is an important distinction to keep in mind as you finalize your 2021 tax planning strategy.
Contact us today for specific advice on your personal situation and how you can make the most of your retirement savings plan. With offices in Rutland and Williston, Vermont Copper Leaf Financial develops a customized wealth management plan designed to integrate every aspect of your financial life.