Life today is expensive, and contributing to a retirement plan is more beneficial than ever. Recently, the IRS announced it was raising the contribution limit for 401(k)s to $23,000 for 2024, up from $22,500. In a world where pensions are nearly gone, having the ability to put more money away can help you prepare for a retirement that may be here faster than you think.
According to the Investment Company Institute, Americans had more than $7 trillion in 401(k)s and $13 trillion in individual retirement accounts (IRAs) in the second quarter of 2023, and only about half of Americans had any retirement funds saved up at all. Were you one of them? How will the new changes impact you?
It is not only the 401(k) that has changed
If you are somebody who is building not only a 401(k) but a 403(b), one of several 457 plans, or you are eligible for the federal government’s Thrift Saving Plan, the limit on elective deferrals for 2024 will also grow to $23,000, about a 2% increase from last year.
For individuals age 50 or older, you will be allowed a “catch-up contribution,” an additional $7,500 for a total of $30,500.
If you save using a Roth or traditional IRA
IRA contribution limits also increase $500 for 2024 to a limit of $7,000 ($6,500 in 2023) and to $8,000 for those age 50 or older.
A Roth IRA requires you to pay income tax on your contributions the year you make them, but any withdrawals at retirement or before retirement (if eligible) will be tax-free. The rules are as follows:
- If you are single, make over $87,000, and have access to a workplace savings plan, you won’t get a tax `break when you contribute to a traditional IRA.
- If you are married, and the spouse (who has a savings plan at work) contributes to an IRA account, you are not permitted a tax break if you earn more than $143,000 annually. If the spouse making the IRA contribution does not have access to a workplace plan, but the other spouse does, that threshold climbs to $240,000.
- If you are single, head of household, or married filing separately (you didn’t live with a spouse during the year) and earn $161,000 or more, you may not contribute to a Roth IRA. If you are married filing jointly, and earn $240,000 or more, you also may not contribute to a Roth IRA.
- If your income is too high and you can’t contribute to a Roth IRA, there is a way around that called a backdoor Roth IRA. To do this, you have to put money into a traditional IRA and then convert the account to a Roth IRA.
Are you eligible for the Retirement Savings Contributions Credit (Saver’s Credit)?
Low- and moderate-income households may get help from the saver’s credit, which pays up to $1,000 for individuals and up to $2,000 for married couples, depending on income and contribution amounts. As of 2024, if you are single, to qualify, your income must be below $38,250. Head of household must be less than $57,375 and below $76,500 if you are married filing jointly.
Other contribution and cost-of-living adjusted limits for 2024 include:
SIMPLE Retirement Accounts Limit:
- Under age 50: $16,000
- Age 50 and older: $19,500
Defined Benefit Plan Limit:
The limitation on the annual benefit under a defined benefit plan climbed to $275,000. Suppose you are a participant who separated from service before January 1, 2024. In that case, your limitation under a defined benefit plan can be calculated by multiplying your compensation limit, adjusted through 2023, by 1.0351.
Defined Contribution Plan Limit:
The total contribution limit for employee and employer contributions to 401(k) defined contribution plans has increased to $69,000 for 2024.
Never too early to plan ahead
Staying up-to-date on changes to contribution limits could benefit you and your retirement strategy. Make 2024 the year you take control of your finances. Schedule a consultation with your financial professional and see how these new changes could impact your financial goals.
Important Disclosures:
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by LPL Marketing Solutions
Sources:
You can save up to $23,000 in your 401(k) next year, IRS says | Morningstar
Roth IRA Contribution and Income Limits 2023-2024 - NerdWallet
IRS increases retirement account contribution limits (kxlh.com)
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