The 401(k) retirement plan, a cornerstone of American retirement savings, is subject to annual contribution limits set by the Internal Revenue Service (IRS). These limits are designed to ensure fairness and equitable access to retirement benefits. In the recent announcement by the IRS on November 1, 2023, adjustments to these limits for the year 2024 were unveiled.
What is a 401(k) Retirement Plan?
A 401(k) retirement plan is a tax-advantaged investment vehicle that enables individuals to save for retirement. Offered by employers, it allows employees to contribute a portion of their pre-tax earnings to the plan, with contributions growing tax-deferred until withdrawal during retirement.
Frequency of Limit Increases
The IRS reviews and adjusts contribution limits periodically to account for inflation and changes in the cost of living. Despite being one of the most advantageous retirement savings options, only 60 million Americans actively contribute to a 401(k). This discrepancy raises questions about awareness, accessibility, or other factors hindering broader participation.
New Contribution Limits for 2024
As of 2024, the IRS has increased the 401(k) contribution limit to $23,000, up from $22,500 in the current year. This adjustment applies to individuals enrolled in 401(k), 403(b), and most 457 plans, along with the Thrift Savings Plan within the federal government.
For participants aged 50 and above, a “catch-up contribution limit” allows contributions of up to $30,500 in 2024. This enhancement encourages older individuals to boost their retirement savings.
Flexibility and Benefits of 401(k) Plans
The 401(k) plan offers qualified individuals flexibility in withdrawals, allowing up to $100,000 without penalties. Participants can also borrow up to $100,000 or 100% of their vested balance, with the option to defer loan payments for up to one year. Managing tax implications, withdrawals can be spread out over a three-year period.
Understanding these contribution limits is crucial for individuals planning their retirement savings strategy. As the IRS adapts to economic factors, these adjustments aim to keep the 401(k) retirement plan a valuable tool for a diverse range of Americans seeking financial security in their golden years. Stay informed about these changes to make the most of your retirement planning.
