Limits on 401(K) contributions will increase in 2024 – here’s how you can plan ahead and boost your retirement pot
- The IRS increases the amount employees can invest in their retirement plans each year, in line with the cost of living
- Consulting firm Mercer expects next year’s contribution limit to increase by $500 to $23,000
- Certified financial planner Rachael Burns says anyone with a salary over $75,000 each year should max out their 401(K)
Financial planners are urging employees to take full advantage of the increase in 401(K) contribution limits that will go into effect in 2024.
Consulting firm Mercer expects next year’s contribution cap to be $23,000 – up from $22,500 this year.
It marks a more modest increase after the threshold increased by $2,000 between 2022 and 2023, but experts insist workers can still make the most of it.
Certified financial planner Rachael Burns says that as a rough guideline, anyone making more than $75,000 a year should get the most out of their 401(K).
“Every situation is different and can depend on where you live and what your circumstances are,” Burns told DailyMail.com.
“But if you have enough money to buy a bigger house or a nicer car, you should max out your 401(K). That should be your priority over everything else.”
Consulting firm Mercer expects next year’s contribution limit to be $23,000 – up from $22,500 this year
The IRS increases the amount employees can invest in their retirement plans each year, in line with the cost of living.
The cap shot up this year to offset the glowing inflation, which surpassed 9 percent in June last year. However, with annual inflation now at a more reasonable 3.2 percent, the jump next year will be much smaller.
Burns says it’s imperative that workers keep up with the increases to ensure a good quality of life after retirement.
She said: “When I sit down with clients, I always consider increases in premium limits and make sure they maximize them.
“The difference can be shocking because the compound growth of those increases over ten, twenty, thirty years can make a huge difference.
“You need to keep increasing your savings so you’re prepared because the cost of living will continue to rise by the time you retire.”
Certified financial planner Rachael Burns says anyone making more than $75,000 a year should max out their 401(K) contributions
A 401(K) is a private pension to which both an individual and their employer contribute. This usually accounts for the bulk of a retiree’s income.
By maximizing contributions to your account, employees can take advantage of tax-deferred growth.
With a traditional 401(K) plan, employees don’t have to pay taxes on their retirement savings, but they do pay income taxes during retirement.
But in the intervening years, savers can take advantage of compound growth on their pots. Compound growth is the interest that accrues on your savings, effectively snowballing your money.
For example, if an employee puts an additional $500 into his 401(K) next year and it generates an investment return of 10 percent, he would end the year with $550.
The following year, interest would accrue on the $550 amount.
The IRS sets limits on what employees can contribute to their retirement plan to balance the tax benefits of these pots. In fact, it prevents excessive deferred tax savings from growing on individual accounts.
Other retirement plans, such as Roth IRAs, place similar limits on contributions.
Depositors should be careful not to exceed these limits, as this could result in the IRS requiring you to immediately pay taxes on the excess money.
And if you withdraw the money, you will likely be taxed again. You then end up paying double the tax you would normally pay.
To calculate contribution limits, the IRS uses cost-of-living adjustment and rounding methods from the Internal Revenue Code, as well as the Consumer Price Index for All Urban Consumers (CPI-U) and estimated CPI-U values for specific months . .