Let’s face it, business owners are constantly receiving and analyzing pertinent information in an attempt to make the best decision for their company. Not only will business owners make decisions that will affect their employees for their lifetime—such as choosing the right retirement plan for the companies—but they also must stay up to date on all minor changes to retirement and tax regulations to make sure that all contributions to retirement plans are legal.
We at Nichols Financial Strategies are here to keep you updated on any changes that will affect you and your company, such as the annual changes to your employees’ allowable retirement contributions. As you are aware, the Internal Revenue Service adjusts the maximum allowable contributions to retirement plans and IRAs based on the cost-of-living adjustments every year.
The good news is that the 2021 changes to the maximum retirement plan contributions implemented by the IRS are fairly straightforward, with only a few changes to the limits. To help you stay informed, we have outlined below the IRS’s latest retirement contribution regulations.
2020 To 2021: What Stayed The Same?
To keep things simple, let’s start with what has stayed the same. Most of the contribution limits—including the elective deferral contributions for 401(k), 403(b), and 457(b)—will stay the same in 2021.
So this means that the annual salary deferral contribution limit for 401(k), 403(b), and 457(b) plans will remain at $19,500. And the salary deferral catch-up contribution limit for employees who are 50 years old or older will also remain the same at a maximum amount of $6,500.
Do you have a highly compensated employee who earned $130,000 or more in 2020? Limitations for those employees, commonly called HCEs, have also remained the same, meaning they will have the same contribution limitations in 2021 as they did in 2020.
The maximum annual benefit provided under the defined benefit plan has remained unchanged at $230,000. (1)
2020 To 2021: What Changed?
While many contribution limits to retirement plans have not changed, some were adjusted due to cost-of-living increases. The total annual contribution limit for a defined contribution plan increased from $57,000 to $58,000. And the annual compensation limit increased from $285,000 to $290,000. (2)
Educate Your Employees
Of course, not all employees will be able to contribute the maximum amount to their retirement plans, but it is a good idea to encourage your employees to contribute as much as they can to their retirement. Even contributing 1% more can make a huge difference in 10 or 20 years.
It is also necessary to keep these changes in mind to make sure your business is abiding by the regulations on the limits for the employers’ contributions to the employees’ retirement plan.
In 2018, the Treasury Inspector General for Tax Administration conducted a report on whether taxpayers comply with the annual contribution limits for 401(k) plans. The report found that some retirement plans did not prevent taxpayers from exceeding the annual limit. Employees with more than one retirement plan were particularly vulnerable to this error. (3)
The report suggested that employers educate their employees on the maximum contribution amount and use payroll systems designed to not accept contributions that exceed the annual dollar limit.
We’re Here To Help
Do you have questions about adjustments to retirement plan contributions? We at Nichols Financial Strategies can help answer them. Reach out to us at 559-440-6999 or by email at firstname.lastname@example.org.
T. Matthew Nichols is founder, CEO, and wealth advisor at Nichols Financial Strategies with more than 20 years of experience in the financial industry. He spends his days serving business owners and families, specializing in helping those in the agriculture industry proactively prepare for the unique challenges they face in a rapidly changing economy. Matt is an Accredited Investment Fiduciary® (AIF®) and holds his FINRA Series 7 and 63 securities registrations with LPL Financial and his California State Life & Health Insurance license. He’s also pursuing his ChFC designation and is dedicated to continuing his education and staying abreast of the latest financial trends and strategies. Matt’s mission is to help his clients transfer wealth from one generation to the next and work toward achieving their goals so they can spend more time on what they love most. Matt was born and raised in the California Central Valley and resides in Fresno with his wife, Christy, and their two daughters, Holly and Jillian. He enjoys golf, traveling, skiing, and spending quality time with his family. To learn more about Matt, connect with him on LinkedIn.