401k plans are a great way to save for retirement. It allows you to save pre-tax money, have it grow tax-free, and make withdrawals tax-free in retirement. However, there are limits on how much you can contribute to your 401k each year. In this article, we will look at the 401k limits for 2023 and 2024.
401k Limits for 2023
The IRS sets the annual contribution limit for 401k plans each year. For 2023, the limit is $19,500 for people under age 50. Those 50 and older can contribute an additional $6,500 for a total of $26,000. There is also an overall cap of $58,000 on combined employee and employer contributions. This includes any employer match or profit-sharing contributions.
It’s important to note that the contribution limit applies to all 401k plans, including SIMPLE 401k plans, SARSEP plans, and Roth 401k plans. You cannot exceed the limit across all plans combined. If you contribute more than the limit in one year, you will be subject to a 6% excise tax on the excess amounts.
401k Limits for 2024
The IRS often adjusts the 401k contribution limit each year to keep up with inflation. For 2024, the contribution limit is expected to increase to $20,500 for people under age 50. Those age 50 and older can contribute an additional $7,000 for a total of $27,500. The overall cap on combined employee and employer contributions is expected to increase to $61,000.
It’s important to remember that these numbers are only estimates. The IRS has yet to officially announce the 401k limits for 2024. The actual numbers could change when the IRS makes the official announcement.
Maximizing Your 401k Contributions
The key to maximizing your 401k contributions is to plan ahead. Know what your contribution limit is for the year, and make sure you don’t exceed it. If you are close to the limit, you can look into other retirement options such as a Roth IRA or traditional IRA.
Another important tip is to take advantage of any employer match. If your employer offers a 401k match, make sure you are contributing enough to get the full match. This is free money that can help you save for retirement.
When to Make Your Contributions
When it comes to making your 401k contributions, timing is key. You can make contributions at any time throughout the year, but it’s best to spread them out over the year. This way, you can take advantage of compounding interest and maximize your savings.
You also want to make sure you make your contribution before the deadline. The deadline for 2023 contributions is April 15, 2024. If you miss the deadline, you will be subject to a 6% excise tax on the excess amount.
Tax Benefits of a 401k
In addition to the contribution limits, it’s important to remember the tax benefits of a 401k. Contributions to a 401k are made pre-tax, meaning you don’t have to pay taxes on the money until you make a withdrawal in retirement. This will reduce your tax bill today and help you save more for retirement.
Additionally, any earnings on the money in your 401k are tax-free until you make a withdrawal. This allows your money to grow faster, since it isn’t being eaten away by taxes. This is a great benefit that you should take advantage of.
The 401k contribution limits for 2023 and 2024 are important to know when planning for retirement. The limit for 2023 is $19,500 for people under age 50 and $26,000 for those 50 and older. The limit for 2024 is expected to increase to $20,500 and $27,500 respectively. It’s important to remember to stay within the limits and take advantage of the tax benefits of a 401k.