Yahoo Finance 401(k) contribution limits are projected to rise in 2024 — here are 3 easy ways to plan ahead and charge up your retirement savings
The 401(k) contribution limit could increase by $500 in 2024, according to new projections from Mercer.
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While significantly lower than the 2023 record-setting increase, the bump would still allow 401(k) plan participants to grow their retirement funds at an accelerated pace and reduce their 2024 taxable income further than before.
Before you decide how much to change your retirement contribution, we recommend that you review your finances and consult a financial professional to strategize for the best outcome.
How much will the 401(k) contribution limit increase?
If Mercer’s predicted $500 increase in the annual 401(k) and 403(b) contribution limits is correct, the limit would rise from $22,500 to $23,000. Though Mercer does not predict a jump in the current catch-up contribution limit of $7,500, a person over 50 would potentially contribute up to $30,500 to their 401(k) in 2024.
The IRS sets annual limit increases based on the Consumer Price Index for All Urban Consumers between the third quarters of 2022 and of 2023. The agency will announce the final figures this October or November.
3 ways to prepare for a 401(k) increase
According to the American Retirement Association, 43% of 401(k) plan participants earn less than $50,000 per year. In other words, many if not most households can't realistically save the full $23,000 projected for next year. But even if you can't max out your contribution, here are three ways to save more.
1. Revisit your budget.
It takes an extra $41.67 a month to increase your 401(k) contribution by $500 a year. If you receive 26 paychecks a year, that comes out to $19.23 per check. Consider these options for coming up with the cash:
Cut a monthly streaming subscription or a membership you don't use
If you're due a tax refund, contribute the refund to your 401(k)
Use any raise or bonus you receive in 2024 to increase your 401(k) contribution
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2. Don't over-save
It may sound counter-intuitive but you can damage your retirement outlook by adding too much money to your 401(k).
If your emergency savings is insufficient, putting all of your surplus income into a retirement account will leave you cash-strapped.
Once you're in that position, you're more likely to use high-interest debt (e.g. credit cards) to cover expenses, or take out a costly 401(k) loan. Both moves can hurt your retirement planning, so prioritize emergency savings first.
Contribute more than the allowed amount to your 401(k) and you could be penalized, with the money treated as taxable income in addition to any earnings. You can also be taxed on the money a second time when you take your distribution.
3. Talk to a professional
Unless you're a financial professional, chances are you're guessing when it comes to your retirement and tax strategies.
The best way to ensure you can take full advantage of the new contribution limits — whether to your 401(k), 403(b) or other account — is to consult with a professional, since changing your retirement contribution can impact several key areas of your finances:
Taxable income for the tax year you contribute
Projected retirement income
Taxes due when you take a distribution
A financial professional can also determine whether any surplus would be better used elsewhere. For example, the health savings account (HSA) contribution limit (for self-only coverage) will increase by $300 for 2024, so putting more money into your HSA could be a smart move.
Who is qualified to help you? According to the Department of Labor, your financial adviser should be a "fiduciary," meaning they are legally obligated to protect your interests and "cannot receive payments that create conflicts of interest." Many "fee-only" advisors fall into this fiduciary category.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
