Mark your calendars now: 401k contributions are generally due at the end of the calendar year. However, the IRS allows contributions to IRA accounts up to the tax filing deadline of the coming year. In 2021, you can contribute to your IRA accounts until May 17, 2021. If you have a SEP IRA and file an extension, you have until the extended filing deadline or when you file your tax return to make the contribution.
Most employer tax deductions for 401k contributions and other salary retirement plans usually apply only to the calendar year in which they are actually withheld from the taxpayer’s paycheck.
However, employers can make contributions until their tax deadline for the year. For 2020 tax filing, businesses typically have until May 17, 2021. This offers added flexibility for those doing one-time contributions, profit sharing, or other one-off arrangement. This also means an employee technically can make 401k contributions as late as the deadline for their company to file its taxes, including any extensions.
Additional time becomes especially important in the case of someone who is self-employed. Individuals in these circumstances may not choose to contribute to their solo 401k plan for a given year until tax time the following year. The ability to do so can depend on the business type and whether the contribution is by employee deferral or through a profit-sharing component.
401k plans can vary, so we recommend talking with an HR professional. For instance, contributions for a prior year may not be allowed because an employee is limited to making contributions through payroll deductions.
What Are the 401k Contribution Limits?
Tax deductible contributions to 401k plans and other retirement accounts are subject to IRS limits. These limits are given cost-of-living adjustments from time to time, and the IRS has just announced how those adjustments will affect contribution limits for 2020.
For tax years 2020 and 2021, the 401k contribution limit is $19,500 who those who participate in 401k, 403(b), and most 457 plans. If you’re over the age of 50, your limit is $26,000.
Read More: 401k Contribution Limits for 2020 and 2021
What Is the Maximum 401k Contribution for 2020?
Employer-matching contributions don’t count toward this limit, but there is a limit for employee and employer contributions combined: Either 100% of your salary or $57,000 ($63,500 if you’re over 50), whichever comes first.
Limits for Highly Compensated Employees
If you earn a high salary, you may be considered a highly compensated employee (HCE), subject to more stringent contribution limits. To prevent wealthier employees from benefiting unfairly from the tax benefits of 401k plans, the IRS uses the ADP test to ensure that employees of all compensation levels participate proportionately in their companies’ plans.
How the CARES Act Affects Your 401k Contributions
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) aimed to help Americans cope with the unprecedented financial fallout from the COVID-19 pandemic.
Among its provisions, the CARES Act made it easier in 2020 to withdraw up to $100,000 from certain tax-advantaged retirement accounts like your 401k and traditional Individual Retirement Accounts (IRAs). These temporary changes eliminated tax penalties on certain early withdrawals and relaxed rules on loans you could take from some types of accounts.
The CARES act gave retirement savers extraordinary flexibility to manage the resulting tax liability. You can choose to spread the taxes owed over three years, or pay it all this year if your income (and thus your tax rate) was much lower in 2020.
Alternatively, the CARES Act provided up to three years to redeposit the withdrawn money into a retirement account — normally you’d have only 60 days. If you restore the retirement funds within three years, you won’t owe tax until you take distributions in retirement. You may, however, have to file an amended tax return to get back any tax you paid before redepositing the funds into retirement savings.
The Bottom Line
Generally, the 401k has a hard contribution deadline at the end of the year. But you can check with their human resources department or Personal Capital financial advisor on how to make the best decisions for your retirement and to see if you’re permitted to make contributions in the new year— before tax time.
Suggested Next Steps for You
- Sign up for Personal Capital’s free financial tools to track your entire portfolio for free, and see your chances for retirement success.
- Consider speaking to a financial advisor about your retirement plan.
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