401(K) contribution limits are set to rise in 2024 – here’s how to plan ahead and turbocharge your retirement pot
- The IRS increases the amount workers can invest into their retirement plans each year in-line with living costs
- Consultancy firm Mercer projects that the contribution limit for next year will increase by $500 to $23,000
- Certified financial planner Rachael Burns says anyone with a salary over $75,000 should be maxing out their 401(K) every year
Financial planners are urging workers to make the most of an increase to 401(K) contribution limits set to come into effect from 2024.
Consultancy firm Mercer projects that the contribution limit for next year will be $23,000 – up from $22,500 this year.
It marks a more modest increase after the threshold jumped 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 guide anybody earning over $75,000 a year should be maxing out their 401(K).
‘Every situation is different and it can depend on where you live and what your circumstances are,’ Burns told DailyMail.com.
‘But if you have enough money to be buying a bigger home or a nicer car, you should be maxing out your 401(K). That should be your priority above everything else.’
Consultancy firm Mercer projects that the contribution limit for next year will be $23,000 – up from $22,500 this year
The IRS increases the amount workers can invest into their retirement plans each year in-line with living costs.
The limit shot up this year to compensate for red-hot inflation which surpassed 9 percent last June. However, with the rate of annual inflation now at a more reasonable 3.2 percent, next year’s jump will be much smaller.
Burns says it is imperative that employees keep up with the increases in order to guarantee a good quality of life in retirement.
She said: ‘When I sit down with clients, I always factor in contribution limit increases and make sure they are maxing them out.
‘The difference can be shocking because the compound growth of those increases over ten, twenty, thirty years can make a huge difference.
‘You have to keep on inflating your savings so you’re prepared because the cost of living will continue to go up by the time you retire.’
Certified financial planner Rachael Burns says anybody earning over $75,000 a year should be maxing out their 401(K) contributions
A 401(K) is a private pension into which an individual and their employer both contribute. This is usually responsible for the bulk of a retiree’s income.
Maximizing contributions into your account lets workers take advantage of tax-deferred growth.
With a traditional 401(K) plan, employees do not have to pay taxes on their retirement savings – but they will have to pay income tax during retirement.
But in the intermittent years, savers can benefit from compound growth on their pot. Compound growth is the interest that accrues on your savings – allowing your money to effectively snowball.
For example, if a worker put an extra $500 into their 401(K) next year and this went onto generate a 10 percent investment return, they would end the year with $550.
The next year, interest would then accrue on the $550 figure.
The IRS puts limits on what workers can contribute to their retirement plan to balance the tax advantages of these pots. In effect, it prevents excessive tax-deferred savings from growing in individual accounts.
Other retirement plans such as Roth IRAs place similar caps on contributions.
Savers have to be careful not to breach these limits as doing so can cause the IRS to demand you immediately pay taxes on the excess funds.
And when you withdraw the funds, you will likely be taxed again. It means you end up paying double the levy you would usually.
To calculate its 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.