A 401(k) retirement plan is a tax-advantaged investment vehicle in the United States designed to help individuals save for their retirement. Named after a section of the Internal Revenue Code, these plans are offered by employers, allowing employees to contribute a portion of their pre-tax earnings to the plan. The contributions grow tax-deferred until withdrawal during retirement, providing a powerful means of long-term savings.
To maintain fairness and ensure that 401(k) plans benefit a broad spectrum of employees, the Internal Revenue Service (IRS) imposes limits on the amount individuals can contribute annually. These limits prevent high-income earners from disproportionately benefiting from the tax advantages associated with 401(k) plans. By capping contributions, the IRS aims to promote equitable access to retirement benefits among employees at various income levels.
Frequency of Limit Increases for the 401(K) Retirement Plans
Employers with a workforce of 100 or more are required to submit an annual report detailing their employees’ demographic data to the Equal Employment Opportunity Commission (EEOC) by the upcoming month, according to the recent announcement by the agency on October 31.
The IRS periodically reviews and adjusts the contribution limits to account for inflation and changes in the cost of living. Adjustments are not necessarily an annual occurrence, but rather a response to economic factors. This periodic reassessment ensures that the contribution limits remain relevant and effective in facilitating retirement savings.
Despite being one of the most advantageous retirement savings options, only 60 million Americans actively contribute to a 401(k). This figure is quite surprising, especially when considering that 68% of employed Americans have access to employer-sponsored plans. The underutilization of such a beneficial tool raises questions about awareness, accessibility, or other factors that may hinder broader participation in securing financial futures through 401(k) contributions.
New 401(k) Retirement Plans’ Limits for 2024
In a move announced on November 1, the IRS disclosed an increase in the 401(k) contribution limits for 2024. Employees will now have the opportunity to contribute up to $23,000 to their retirement savings accounts, marking a rise from the $22,500 limit in the current year. This adjustment is applicable to individuals enrolled in 401(k), 403(b), and most 457 plans, along with the Thrift Savings Plan within the federal government.
For employees aged 50 and above participating in these plans, a “catch-up contribution limit” allows contributions of up to $30,500 starting in 2024.
The 401(k) plan provides qualified individuals with the flexibility to withdraw up to $100,000 without facing penalties. Additionally, participants can borrow up to $100,000 or 100% of their vested balance, with the option to defer loan payments for up to one year. Furthermore, the tax implications of withdrawals can be managed by spreading them out over a three-year period.