According to Mercer’s most recent estimates, 401(k) contribution limits should continue to rise into 2024. However, lower inflation now means a lower forecast for 401(k) and other retirement plan contribution limits for next year.
Mercer forecasts the annual cap to increase to just $500 in 2024, after rising from $20,500 in 2022 to $22,500 in 2023. That means a new 401(k) contribution limit of $23,000 for 2024, which should still be of great benefit to you.
Projected Retirement Contribution Limits for 2024
According to the report, Mercer envisions the IRS raising the contribution limit to $500 in 2024 for not only 401(k)s, but also 403(b) and eligible 457 plans. Again, this means the contribution limit will increase to $23,000 in 2023, compared to $22,500.
This 2023 increase comes on top of a $1,000 increase in 2022 compared to 2021. If the 2024 increase plays out as projected, it would make it one of the smaller increases in the annual adjusted range over the past few years.
What this projected 2024 growth could mean for you
Understanding and following these limits is central to strategic retirement planning. This allows you to maximize savings without going beyond the limits set by tax laws.
Maxing out contributions lets you take advantage of tax-deferred growth with a traditional 401(k) or take advantage of after-tax savings in retirement with a Roth 401(k). Your company may also offer employer matching contributions which may provide an opportunity for even greater growth.
If you don’t contribute the maximum, you could be leaving valuable benefits on the table. However, you don’t want to go overboard, as this can have huge negative consequences. Notably, your excess contribution may be taxed twice.
When you contribute more than the limit, the IRS may require you to pay taxes on the excess money immediately, according to your current tax bracket. but that’s not all. When you later withdraw the funds, as is the case with all 401(k) withdrawals, you’ll owe taxes again on these already taxable funds. For those under the age of 59.5, you may also have to pay a 10% early withdrawal tax.
How 401(k) Contribution Limits Work
The IRS sets these limits. To calculate this, the IRS uses cost-of-living adjustments and rounding methods from the Internal Revenue Code as well as the Consumer Price Index (CPI-U) for all urban consumers and projected CPI-U values for specific months. Profit analysts make forecasts based on their interpretations of the available data.
The importance of 401(k) contribution limits lies in how they regulate the amount of money that individuals can contribute to their 401(k) accounts each year. These limits are designed to balance the tax advantages of contributing to a traditional 401(k), preventing excessive tax-deferred savings in the process. The same is true for Roth 401(k)s, as the limits place a limit on the return-based benefits a person can see themselves using up over their lifetime.
By setting contribution limits, the IRS attempts to ensure that the tax benefit is more equitably distributed among taxpayers, including those with different income levels. Additionally, periodic adjustments to these limits reflect an effort to maintain the real value of these contributions over time against a backdrop of inflation and changing economic conditions.
ground level
Mercer anticipates increasing the 401(k) contribution limit by $500 to $23,000 for 2024, indicating how the IRS might look at this year’s inflation and economic conditions compared to last year. In short, a modest expansion of the range to $500 for 2024 largely reflects a softening of inflation in 2023. Understanding these changes and planning accordingly will make it possible for you to make the most of tax benefits and accumulate more retirement savings.
Retirement Planning Tips
Photo credits: ©iStock.com/pinkomelet, ©iStock.com/LaylaBird
