Max out your contributions as often as you can.
Knowing the limits will help you make the maximum contributions to your specific type of retirement account without exceeding the limits. Ideally, you will contribute as much as you can each year prior to retirement. Once you are no longer working and receiving an earned income, you can no longer contribute to your retirement accounts. Embrace the opportunity while you can.
Making the maximum contribution each year allows you to take tax deductions (as applicable) and save as much as you can before you get to retirement age. The sooner you begin saving, the sooner you can retire. The years fly by before you know it. (Where did all of this grey hair come from?!)
Let's take a look at the contribution limits:
In 2021, you can contribute $19,500 to your 401k. This is typically done through payroll deduction. The total contribution limit for you and your employer combined is $58,000. If you have both a traditional 401k and a Roth 401k, your total contributions can’t exceed the $19,500 limit.
Note: 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. Go ahead and contribute the max to both accounts.
If you have retirement plans from previous employers that are floating around it is a good idea to review it with your advisor. Give me a call. There are pro's and con's to leaving the funds where they are versus rolling them into an IRA. You'll want to weigh your options to ensure you're on the optimal path for retirement.
If you have an IRA (whether Roth or traditional), your annual contribution limit is $6,000. If you are over 50 years old, your limit is $7,000. If you don't have an IRA, we can get one set up for you.
Small Business Owners & Sole Proprietors
Small business owners pay a lot in taxes. There are IRA accounts that allow higher contribution limits than Traditional or Roth IRA's, which can also help to offset your taxable income and provide an incentive for employees. SEP IRA's allow contributions of up to 25% of your net income with a cap of $57,000. SIMPLE IRA's have a limit of $13,500 ($16,500 for individuals over 50). Both SEP and SIMPLE IRA's have employer requirements if you have employees. These considerations are best discussed individually to ensure the needs of your company and employees are met.
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 the excess contributions, but you should do it sooner rather than later. If you don’t move the money within the same tax year, you may incur additional taxes for every year the excess money stays in your account.
It’s important to note that while these are the current limits for each retirement account, the amounts can - and often do - change each year. As a firm, we keep up with the current limits so you can get the most out of your retirement account.
It's a pleasure to be of service. If you would like more information about the different types of retirement accounts or your overall retirement strategy, don't hesitate to contact the office. I'd be happy to hear from you. We can walk through the details to make sure you have what you need. Let's maximize your financial potential!
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.