2024 Retirement Plan Contribution Limits

What is the 401k Contribution?

A 401(k) is a retirement savings plan available through many American employers. It's a defined contribution plan, meaning both the employee and employer can contribute to it within IRS-set limits. With a traditional 401(k), employees have a portion of their paychecks automatically deposited into an investment account, often with an employer match.

These contributions are deducted from gross income, reducing taxable income for the year and are taxed when withdrawn in retirement. In contrast, a Roth 401(k) deducts contributions from after-tax income, so there's no immediate tax deduction, but withdrawals, including investment earnings, are tax-free in retirement.

The 401(k) plan was created by the U.S. Congress to encourage retirement savings and provides tax advantages to savers, making it a popular choice for many Americans to build their retirement nest egg.

2024 Retirement Plan Contribution Limits

In 2024, the Internal Revenue Service (IRS) has raised the contribution limits for various retirement savings plans, offering an opportunity for individuals to maximize their retirement savings. The contribution maximums for plans such as 401(k), 403(b), and most 457 plans have increased from $22,500 to $23,000, allowing individuals to contribute more towards their retirement.

Additionally, the federal government's Thrift Savings Plan also benefits from this adjustment. For those who rely on individual retirement accounts (IRAs), the contribution limit has risen by $500, going from $6,500 to $7,000. This change not only encourages more substantial retirement savings but also makes it more accessible for more people to contribute to Roth IRA accounts, enhancing their retirement planning options.

401 (K) Contribution Limit for the Year 2023 and 2024 Comparision

In this comparison, we take a closer look at the 401(k) contribution limits for the years 2023 and 2024. Understanding these changes is crucial for individuals planning their retirement savings, as adjustments to these limits can significantly impact how much they can set aside for their future. Let's examine the key differences in contribution limits for these two years.

What is the Maximum 401k Contribution for 2024?

The maximum 401(k) contribution for 2024 is $23,000, allowing individuals under 50 to contribute this amount to their 401(k) accounts for their retirement savings. This represents a $500 increase compared to the previous year, providing an opportunity for individuals to set aside more funds for their future financial security.

The allowable contribution to a Roth IRA gradually decreases as your adjusted gross income changes. In 2024, this phase-out range will expand to fall between $146,000 and $161,000 for single individuals and heads of households, compared to the range of $138,000 to $153,000 in 2023. For married couples who file jointly, the range will also see an increase, extending between $230,000 and $240,000.

What are the Rules for 401K Contribution Limits?

When it comes to 401(k) contribution limits, there are rules to follow, especially when it comes to withdrawing the money. If you want to take money out of your 401(k) before the specified rules, you'll usually face a 10% tax penalty if you're younger than 59.5 years old. However, with IRAs, you don't necessarily need a specific reason to make a withdrawal; you just need a triggering event.

Common triggering events include retiring or leaving your job, becoming disabled or passing away, reaching the age of withdrawal, the plan being terminated, or facing financial hardship. It's important to be aware of these rules and events when considering your 401(k) contribution limit and planning your retirement savings.

How to Select the Ideal Retirement Savings Plan?

Selecting the right retirement savings plan is a crucial first step before maximizing your contributions. Different plans come with their own advantages and disadvantages. Traditional IRAs and 401(k)s allow contributions with pre-tax income, reducing your taxable income for the year. This means you're not taxed on contributions or earnings until you make withdrawals.

401(k)s offer the advantage of higher annual contribution limits compared to IRAs, but they often have more limited investment choices. On the other hand, Roth IRAs are taxed upfront, allowing your investments to grow tax-free over time. Choosing a Roth can be beneficial if you expect to be in a lower tax bracket during retirement, helping reduce your overall tax burden.

While there are other account differences to consider, all these options are solid long-term investment choices, offering tax advantages and allowing your contributions to grow and compound over time.

If your 401(k) plan offers employer matching, it's wise to start there. Employer matching means your company matches a portion of your contributions, often up to a specific limit, such as 50% on the first 6% of your salary. This is an opportunity you don't want to miss, according to certified financial planners. Employer-sponsored plans are easy to set up and automate, and they typically have higher contribution limits compared to IRAs.

IRAs and Roth IRAs may also be subject to income limits, which are less of a concern with employer plans. Regardless of your choice, strive to save as much of your income as possible for retirement, as most people find they wish they had saved more.