Chicago, Illinois – Planning for retirement is a priority for many individuals, and employer-sponsored 401(k) plans play a pivotal role in this endeavor. These plans offer substantial tax benefits while facilitating systematic savings for the future. Employees are able to designate a percentage of their income for automatic deductions, which are then invested in the account. This investment can be allocated among various options, typically including a range of mutual funds. The 401(k) plan, available in traditional and Roth options, serves as a tax-efficient vehicle designed to encourage retirement savings.
The Internal Revenue Service (IRS) has recently announced adjustments to the contribution limits for 2024. The maximum amount an individual can contribute to their 401(k) plan is now $23,000, an increase from the previous year’s limit of $22,500. For those aged 50 and older, an additional catch-up contribution of $7,500 is permitted, bringing the total employee contribution limit to $30,500. Combined employee and employer contributions are capped at $69,000.
It’s crucial to note that if an individual has multiple 401(k) plans through different employers, the total employee contribution amount remains fixed for the year. However, contributions to individual retirement accounts (IRAs) are not affected, allowing for additional savings opportunities. In certain scenarios, individuals may surpass their employee contribution limit and explore after-tax contributions. This allows for potential investment growth within the 401(k) account, though taxes may apply upon withdrawal in retirement.
Exceeding the contribution limits can lead to penalties, including a 10% fine and unpaid income taxes on the excess contributions. While most 401(k) plans have safeguards to prevent overcontributions, changing jobs or managing multiple plans may pose challenges. If excess contributions occur, a timely request for their return is essential by April 15, including any earnings accrued within the 401(k).
Determining how much to contribute to a 401(k) can be challenging, but a common guideline suggests aiming for at least 15% of one’s income annually, including employer contributions. This includes contributions to other retirement accounts, such as a Roth IRA. To optimize 401(k) savings, considering contributing early, taking full advantage of employer matches, and working toward the recommended 15% for retirement. Incremental increases in the contribution rate, especially with raises or bonuses, can substantially boost a retirement nest egg.