You’ll often hear that it’s really important to save well for retirement so you don’t wind up overly reliant on Social Security once your career comes to an end. Those benefits, if not slashed universally due to a massive funding shortfall, will replace only about 40% of your pre-retirement earnings, assuming you bring home an average wage.
Many seniors, however, need more replacement income than that. And that’s where your nest egg comes in. The larger it is, the more financial freedom you buy yourself for retirement.
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Now, if you have access to a 401(k) plan or a similar retirement plan through your job, you may have been striving to contribute the maximum amount allowed this year. If you’re under 50, that’s $22,500. If you’re over 50, that’s $30,000, thanks to a $7,500 catch-up provision.
Next year, however, you’ll have even more opportunity to sock money away in a 401(k). And that’s an opportunity you don’t want to pass up if you can afford to max out.
You can save even more in 2024
The IRS just announced that 401(k) limits are rising in 2024. In the new year, you’ll be able to contribute up to $23,000 to 401(k), 403(b), and most 457 plans, as well as the federal government’s Thrift Savings Plan if you’re under the age of 50.
The catch-up contribution limit for 401(k) plan participants ages 50 and over is holding steady at $7,500. So, older workers can put a maximum of $30,500 into a 401(k), 403(b), and most 457 plans, as well as the Thrift Savings Plan.
The upside of maxing out a 401(k)
The more money you put into your 401(k), the more retirement wealth you stand to grow. But that’s not the only reason to try to max out in 2024.
If you’re saving for retirement in a traditional 401(k), every dollar you contribute to that plan up to the allowable IRS limit is a dollar of income the IRS can’t tax you on. So, maxing out could result in major savings.
Even if you’re not saving in a traditional 401(k) but rather a Roth, you can still benefit from maxing out. Although Roth 401(k) contributions are made with after-tax dollars, investment gains get to enjoy tax-free treatment. And withdrawals can be taken tax-free in retirement.
More opportunity to build wealth
All told, 401(k) limits rising in 2024 is a good thing. It affords savers the opportunity to shield more income from taxes and accumulate larger nest eggs.
However, it’s also important to be realistic and acknowledge that an increased contribution limit won’t matter for many savers. It’s really hard to max out a 401(k) on an average income. But if you’re unable to max out your 401(k), just do the best you can to increase your contribution rate from one year to the next. Doing that could go a long way — even if your annual contributions aren’t close to the limits the IRS has set.
