As they do each year, the IRS has once again announced the latest updates made to the contribution limits and rules across all retirement plans. Cost-of-living adjustments are fairly common and happen every one to two years due to inflation. This enables Americans to keep pace with the latest costs and how much they anticipate they’ll need to set aside for retirement.
For those people who are super-savers or who might have been previously unable to participate due to their income level, these IRS limit increases are welcomed news. Generally speaking, the more you can contribute, the lower your tax bill will be, and the better position you’ll put yourself in to achieve financial independence someday.
Here’s what you need to know about the new retirement plan limits for 2024.
2024 Contribution Limits for Employer-Sponsored Plans
If you work somewhere that offers a 401(k), 403(b), 457 plan, or the federal government’s Thrift Savings Plan (TSP), then according to the IRS, the following are the new maximum contribution amounts.
Participants may contribute up to $23,000 per year. That’s up $500 from last year’s upper limit of $22,500.
Catch-up contributions by participants aged 50 and older will remain an additional $7,500 on top of the $23,000. This means the maximum they can save is $30,500.
Keep in mind that this is per individual. For example, if you’re employed at a company that has a 401(k) and your spouse works somewhere that uses a 403(b), then the two of you can save a combined total of $23,000 x 2 = $46,000 for the year. If you’re both age 50 and older, then you can save a total of $30,500 x 2 = $61,000.
2024 Contribution Limits for IRAs
Americans who contribute to IRAs (either traditional or Roth style) will also get the opportunity to save more if they choose to do so.
The new annual maximum limit has increased to $7,500. That’s up $500 from $7,000 last year.
Just like employer-sponsored plans, IRA owners aged 50 and older can make catch-up contributions. This amount is an additional $1,000 – the same as it was last year.
Most working Americans qualify to contribute to both an IRA and an employer-sponsored retirement plan. Those who can max out both will be able to stash as much as $7,500 + $23,000 = $30,500
Remember: Before you can use a Roth IRA or make a deductible contribution to a traditional IRA, you have to meet specific income requirements. You can find all of those here on the IRS’s website. Even if you don’t qualify, you always have the option to make a non-deductible contribution to a traditional IRA regardless of how much money you earn.
Why You Should Contribute As Much As Possible
Any time the IRS increases the amount of money you can save for your retirement plans, you should take that as an opportunity. Specifically, there are two key reasons to maximize your contributions.
Greater Growth Potential
Retirement plans are a lot more than just a place to save money. They’re also investment accounts where participants get to pick and choose what they’d like to invest in.
People who are risk averse can choose the safety of more conservative funds. However, those who have a long time horizon or are comfortable with taking on some risk can invest more aggressively and help their portfolio reach its peak growth potential.
In both cases, the magic of investing is that your portfolio will grow and compound as it accumulates more earnings. Given enough time, the volume of those earnings will eventually outweigh the contributions of the account owner.
To see this for yourself, try using a free compound interest calculator like this one from Investor.gov. The power of compounding is how someone earning a modest income can save a portion of their income and eventually retire as a millionaire.
Lower Taxes
Another and more immediate benefit to using your retirement plans is that they reduce how much money you’ll owe the federal government.
Every dollar that gets contributed to a traditional 401(k) or IRA gets deducted from the taxable income you report to the IRS. Therefore, you’ll save more money using one of these accounts than if you tried to do the same thing using a regular brokerage account and after-tax income.
Depending on your tax bracket, saving up to the maximum allowable amount could significantly reduce your bill to the IRS. For example, someone in the 24% tax bracket and saving the full $23,000 into their 401(k) will effectively reduce their federal taxes by $5,520 for the year. That’s $5,520 more they get to keep in their pocket.
How to Save More for Retirement
My absolute favorite tip for boosting your retirement savings is to wait until you get a bump in pay. This could be:
- An annual raise
- Profit-sharing or bonus
- A promotion or other job move that increases your salary
- A new side hustle outside of work
- Etc.
In all of these situations, even though you’ll be receiving more money, you don’t really need it. Chances are that whatever you spent last year will be about the same as what you’ll spend this year too. But this is only if you’re mindful about it and don’t allow yourself to ratchet up your lifestyle just because your income increased.
Instead, take that newfound money and pump it into one of your retirement plans. For instance, if your job gave you a 3% raise, then increase your annual 401(k) contributions by the same dollar amount.
Even if you only take half of that raise and increase your retirement contributions, it’s still better than nothing. Do this for long enough and you’ll eventually hit the IRS maximum.
The other thing you can always do is to eliminate wasteful spending. Start by reviewing your budget and looking for unnecessary transactions. These might be purchases that you didn’t really need or indulgences that you could cut back on. The more fat you can trim, the more you’ll be able to put into your tax-advantaged retirement accounts.
At a bare minimum, if your employer has any sort of matching program where they put money inside your account alongside your contributions, then be sure to get the full amount. Contact your local HR or manager and find out the exact details to participate.
You may not be able to save up to the IRS maximum limit right away. But given the growth and tax benefits your retirement plans offer, it sure makes sense to try. Work out a plan for how you can save more, and you’ll be on the path to achieving financial independence.
Featured image credit: Unsplash
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