The contribution limit for a designated Roth 401(k) for 2021 and 2022 is $19,500 and $20,500, respectively. Account-holders who are age 50 or older may make catch-up contributions of up to $6,500. This means the total contribution can reach as much as $26,000 and $27,000 for both years. Catch-up payments are additional allowed contributions that help those nearing retirement age to bulk up the account in the years before they will need the funds for regular income.
Employers can also make contributions to a Roth 401(k) by matching employee contributions up to a certain percentage or dollar amount. They can also make elective contributions that don’t depend on employee contributions.
The Internal Revenue Service (IRS) adjusts contribution limits each year based on inflation. For 2021, the limit on employee and employer contributions is $58,000 ($61,000 for 2022) or 100% of employee compensation, whichever is lower. Workers who are age 50 and over can add a $6,500 catch-up contribution for a total of $64,500 or $67,500.
Key Takeaways
- Retirement contribution limits are adjusted each year for inflation.
- The limits for IRAs and 401(k)s are different.
- Employers can contribute to employee Roth 401(k)s through a match or elective contributions.
- You may be able to contribute to a Roth IRA, which has separate contribution limits and rules than a Roth 401(k).
- No taxes are due on your withdrawals from a Roth 401(k) in retirement, but after age 72 you must take its required minimum distributions.
Roth 401(k) vs. Traditional 401(k)
Although the contribution limits are the same for traditional 401(k) plans and their Roth counterparts, technically, a designated Roth 401(k) account is a separate account within your traditional 401(k) that allows for the contribution of after-tax dollars. The elected amount is deducted from your paycheck after income, Social Security, and other applicable taxes are assessed. The contribution doesn’t garner you a tax break in the year you make it.
The big advantage of a Roth 401(k) is that no income tax is due on these funds or their earnings when they’re withdrawn after you retire. A traditional 401(k) works in the opposite way. That is, savers make their contributions on a pretax basis and pay income tax on the amounts withdrawn once they retire. Neither of these 401(k) accounts imposes income limitations for participation.
When available, savers may use a combination of the Roth 401(k) and the traditional 401(k) to plan for retirement. Splitting your retirement contributions between both kinds of 401(k)s, if you have the option, can help you ease your tax burden in retirement.
If You Have Multiple Roth Accounts
The question for those who also want to have a Roth IRA: Do you meet the income limits for being permitted to have one? As of 2021, the income phase-out for Roth IRA contributions starts at $125,000 for single filers and eligibility ends at $140,000. For those who are married filing jointly (and qualifying widow(er)s) in 2021, that income threshold starts at $198,000 and ends at $208,000.
In 2022, these figures go up. Income phase-out for Roth IRA contributions starts at $129,000 and ends at $144,000 for single filers. For those married filing jointly, plus qualifying widower(er)s, the income phase-out starts at $204,000 and ends at $214,000.
Thus, if you have both a Roth 401(k) plan and a Roth IRA, your total annual contribution for all accounts in 2021 and has a combined limit of $25,500 ($19,500 Roth 401(k) contribution + $6,000 Roth IRA contribution) or $33,000 if you are 50 or older ($19,500 Roth 401(k) contribution + $6,500 catch-up contribution + $6,000 Roth IRA contribution + $1,000 catch-up contribution). These amounts increase by $1,000 in 2022 because of the adjustments made for inflation by the IRS.
Roth IRA accounts have a separate annual contribution limit of $6,000 for 2020 and 2021, with an additional $1,000 limit for catch-up contributions if you are age 50 or over (for a total of $7,000).
Additional Rules
Roth 401(k) contributions must be made by the end of the calendar year (the 2021 contribution deadline is Dec. 31, 2021). You have a bit more time with Roth IRA contributions—you must make them by tax day.
Five years must pass from your first contribution before you can withdraw from your Roth 401(k) tax-free, and you must also be at least 59½ years old. At age 72, you are required to take minimum distributions from your Roth 401(k), but not from a Roth IRA.