IRS Increases 401(k) Contribution Limits for 2024

IRS Increases 401(k) Contribution Limits for 2024

December 20, 2023

Each year, the IRS sets the maximum amount of money that you and your employer can contribute to a 401(k) plan.

On Nov. 1, 2023, the IRS announced that in 2024, the amount individuals can contribute to their 401(k), 403(b) and most 457 plans — as well as the federal government’s Thrift Savings Plan, a retirement savings and investment plan for federal employees — is $23,000. That’s up from $22,500 for 2023. The IRS also issued technical guidance regarding all of the cost‑of‑living adjustments (COLAs) affecting dollar limitations for pension plans and other retirement-related items for tax year 2024.

The “catch-up contribution” limit for employees aged 50 and over who participate in these plans will remain $7,500 for 2024, the same amount for 2023. This means that participants in 401(k), 403(b) and most 457 plans, as well as the federal government’s Thrift Savings Plan who are 50 and older can contribute up to $30,500 starting in 2024. The catch-up contribution limit for employees 50 and over who participate in SIMPLE plans remains $3,500 for 2024.

The Roth 401(k) contribution limits for 2022, 2023, and 2024 are the same as the pretax limit for traditional 401(k) plans. If you have access to a Roth 401(k) and a traditional 401(k), you can contribute up to the annual maximum across both. This means that if you are under the age of 50, you cannot contribute more than $22,500 total as employee contributions into your 401(k) accounts in 2023, no matter how many accounts you have, and you cannot contribute more than $23,000 total in 2024.

Too many Americans are missing this saving opportunity

Companies are not required to offer 401(k) plans to their employees; many do so as an incentive to attract top talent. A 401(k) plan is a lucrative benefit because it allows you to contribute pretax dollars to a retirement account. So not only do your retirement savings grow over time; you then get to pay less tax on your salary. Instead of paying taxes on your full salary, you will instead pay taxes on your salary minus the amount you contribute to the plan.

In August 2023, the CNBC “Your Money” survey revealed that 41 percent of American workers who were employed either full time or part time were not contributing any money at all to a 401(k) or employer-sponsored plan.

Feeling stressed about money was the main reason they weren’t contributing. This is unfortunate because if these non-savers would work with their fiduciary financial advisors to build financial plans and follow a budget — making a few minor sacrifices in daily spending that would allow them to make those important contributions — that financial stress would likely decrease significantly.

The survey found that 74 percent of Americans were stressed about their personal finances, with 37 percent describing themselves as “very stressed.” Also, 61 percent of Americans consider themselves to be “living paycheck to paycheck,” and the same percent said inflation was the biggest contributor to their financial stress.

Never leave an employer “match” on the table

Just as employers aren’t required to offer 401(k) plans, they are not required to offer matching contributions. But many do so as an added incentive to attract, and keep, the most talented employees.

With a 401(k) match, an employer will make matching contributions to your 401(k) account, up to a certain percentage of your salary. Employers can either match your contributions dollar for dollar or on a percentage of the amount you contribute to your own plan. In 2023, the average 401(k) employer match is between 4 and 6 percent of compensation. The most common structure is a 50 percent partial-match contribution up to 6 percent of an employee’s salary.

For example, this means that if you contribute $100 to your plan, your employer will contribute $50 to your plan. So, if you are not participating in the plan — not contributing to it — not only are you missing out on the opportunity to save for retirement and reduce the taxes you pay on your income; you are also turning down what is essentially “free” money in the form of your employer’s matching contribution.

Resolve to begin saving, or to save more, in a 401(k) plan in 2024

As we move into the New Year and you look at meaningful resolutions to adopt, please resolve to contribute to your employer’s retirement plan, if you aren’t already! You won’t miss the money that much because the contribution is deducted automatically before you get paid. And saving for the future is the best thing you can do for yourself and your family. The sooner you begin saving, the more you can benefit from compound interest over time.

If you are uncomfortable with the idea of saving the maximum amount the IRS allows in 2024, then start smaller. Begin by saving 1 percent of your salary, and then commit to bumping that up to 2 percent after six months or a year. Set the goal to contribute the maximum each year. Your advisor will help you get started.

Take the advice of Ted Benna himself on the significant value of saving for retirement in a 401(k) plan: “It turns spenders into savers by making saving the first priority. And most of us, including me at the time, would never have accumulated what you do with a 401(k), you know, if you had to do it on your own every paycheck.”

 

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