Understanding Contribution Limits
The IRS establishes annual contribution limits for retirement accounts in order to promote equitable savings opportunities and to prevent high-income earners from disproportionately benefiting from tax-advantaged retirement plans. These limits are set by the IRS and work to encourage people across all income levels to save for retirement while making sure the tax benefits are distributed fairly. When you adhere to these limits you're actually optimizing your tax advantages, so don't fret about not being able to contribute more. Sticking to these limits will help you build a robust retirement portfolio, which will ultimately influence your financial security when you retire.
2024 Contribution Limits Overview
Account and Contribution Limit
• 401(k), 403(b), and most 457 plans: $23,000
• 401(k) catch-up contribution (age 50+): $7,500
• Total 401(k) contribution limit (employee + employer): $69,000
• IRA (traditional and Roth): $7,000
• IRA catch-up contribution (age 50+): $1,000
401(k) Contribution Limits
Employee Contribution Limits
For the 2024 tax year, the maximum amount employees can contribute to their 401(k) is $23,000 (up from $22,500 in 2023) which includes all elective employee salary deferrals as well as any contributions made to a Roth account that is within the 401(k). If you're an employee over the age of 50, you're also eligible for an additional catchup of $7,500 which in total allows you to contribute up to $30,500 for 2024.
Employer Contributions
Your employer can also contribute to your 401(k), and the total contribution limit for both you and your employer combined has increased from $66,000 in 2023 to $69,000 in 2024. That said, if you're over 50, your limit is $76,500 with that additional $7,500 catch-up. This means that your employer match can be up to $46,000 if you contribute the $23,000 maximum yourself.
Some employers may also offer after-tax contributions which allow you to contribute additional funds as well, beyond the pre-tax contribution limit. But even then, the maximum is still $69,000 (or $76,500 if you're over 50). These matching contributions are a great way to help you save more for retirement, though the tax advantages are limited when compared to pre-tax and Roth contributions.
Traditional and Roth IRA Contribution Limits
Contribution Limits for 2024
If you have a traditional or Roth IRA, the contribution limit has increased from $6,500 in 2023 to $7,000 in 2024 and serves as a great opportunity to enhance your retirement savings account. If you're 50 or older you can also take advantage of a catch-up contribution here as well for an extra $1,000. This would bring your total contribution limit to $8,000 which can help you bolster your retirement funds and ensure you have ample resources as you get closer to ditching your job for good.
Income Limits and Eligibility
If you want to contribute to a Roth IRA in 2024, you'll need to adhere to specific income thresholds based on your modified adjusted gross income (MAGI) and your tax filing status. If you're single and your MAGI is below $146,000 you can contribute the full $7,000, though the contributions start to phase out if your MAGI is between $146,000 and $161,000—and you can't contribute at all if it's over $161,000.
If you're married and filing jointly, the full contribution limit would apply if your combined MAGI is under $230,000 with a phase-out range up to $240,000. If it's over $240,000, mind you, you won't be able to contribute to a Roth IRA.
Other Retirement Accounts
SEP-IRAs
Simplified Employee Pension Individual Retirement Account (SEP-IRA) is not only a mouthful to say, but it's an attractive option for both small business owners and those who are self-employed to save for retirement. The contribution limit for 2024 is 25% of an employee's compensation up to a maximum of $69,000 and applies to both employees of small businesses and people who are self-employed. Remember, this only applies to you if you're a sole proprietor, a business owner in a partnership, or if you earn self-employment income.
SIMPLE IRAs
Savings Incentive Match Plan for Employees Individual Retirement Account is even more of a mouthful but it's also an IRA designed to provide small business owners and those who are self-employed with a straightforward way to save for retirement. The contribution limit for employees is $16,000 (up from $15,500 in 2023) and employees over 50 can make catch-up contributions of up to $3,500, raising their total limit to $19,500. SIMPLE IRA contributions are done pre-tax which reduces your taxable income amount and enables your funds to grow tax-deferred until you withdraw them, plus employers are required to make matching contributions and even elective deferrals.
Special Considerations
Highly Compensated Employees (HCEs)
If you earned income over $135,000 last year or own more than 5% of a business and participate in a 401(k) plan, your contribution limits can be affected by Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests which compare the contribution rates of HCEs and non-HCEs. If your plan fails, you may be required to lower your contributions or take distributions to maintain compliance.
Excess Contributions
If you contribute more than the limit allows, you'll want to act swiftly. Notify your employer or plan administrator and withdraw the excess funds by April 15 to avoid any penalties. If you don't, the IRS will impose a 6% excise tax for each year it isn't dealt with and would be subject to regular income tax—meaning you could face double taxation on any earnings on the excess if you delay. If this applies to you, it may be wise to speak to a tax professional.
