401(k) contribution limits should continue their upward climb in 2024, according to a recent projection by Mercer. However, easing inflation now means lower forecasts for 401(k) and other retirement plan contribution limits for next year.
After rising substantially from $20,500 in 2022 to $22,500 for 2023, Mercer projects the annual cap to go up just $500 in 2024. That means a new 401(k) contribution limit of $23,000 for 2024, which should still be plenty beneficial for you.
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Projected Retirement Contribution Limits for 2024
According to the report, Mercer envisions the IRS increasing contribution limits by $500 in 2024 for not only 401(k)s, but also 403(b) and eligible 457 plans. Again, that means limits on contributions jumping up to $23,000, compared to $22,500 in 2023.
This 2023 increase came on top of a $1,000 increase in 2022 compared to 2021. If the 2024 increase occurs as projected, that will make it one of the smaller increases to the annually adjusted limit in the last few years.
What This Projected 2024 Increase Could Mean for You
Understanding and adhering to these limits is central to strategic retirement planning. This allows you to maximize savings without going beyond the boundaries set by tax laws.
Maximizing contributions lets you take advantage of either tax-deferred growth with a traditional 401(k) or after-tax savings in retirement with a Roth 401(k). Your company may even offer employer matching contributions that could provide even more growth opportunity.
If you don’t contribute up to the maximum, you could be leaving valuable benefits on the table. However, you don’t want to go over the limit, as that can have hefty negative consequences. Specifically, your excess contributions could wind up being taxed twice.
When you contribute beyond the limit, the IRS can demand you immediately pay taxes on the excess funds, according to your current tax bracket. But that’s not all. Later when you withdraw the funds, just as with all 401(k) withdrawals, you’ll owe taxes yet again on these already-taxed funds. For those under 59.5 years old, you could end up also paying a 10% early withdrawal tax too.
How 401(k) Contribution Limits Work
The IRS determines these limits. For its calculations, 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. Benefits analysts base forecasts on their interpretations of the available data.
The significance of 401(k) contribution limits lies in the way they regulate the amount of money that individuals can contribute to their 401(k) accounts each year. These limits are designed to balance the tax advantages of contributing to a traditional 401(k), preventing excessive tax-deferred savings in the process. The same is true for Roth 401(k)s, as the limits place a cap on the returns-based upside someone could see using one over their lifetime.
By capping contributions, the IRS tries to ensure that the tax benefits get distributed more equitably among taxpayers, including those with varying income levels. Additionally, the periodic adjustments to these limits, reflect an effort to maintain the real value of these contributions over time against a backdrop of inflation and changing economic conditions.
Bottom Line
Mercer’s projected $500 increase in 401(k) contribution limits to $23,000 for 2024 reflects how the IRS could view how the IRS views the inflation and economic conditions of this year versus last year. In short, the modest expansion of $500 in the cap for 2024 largely reflects moderating inflation in 2023. Understanding these changes and planning accordingly makes it possible for you to make the most of tax benefits and accumulate more retirement savings.
Retirement Planning Tips
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Speak with a financial advisor to understand how these changes can impact your retirement goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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SmartAsset’s 401(k) calculator can help you figure out how much you will accumulate in your retirement account based on your annual contribution, your employer’s matches and the anticipated rate of return.
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Source: finance.yahoo.com