In response to inflation, the IRS has announced an increase in the 401(k) contribution limit for 2024, allowing workers to save more for retirement. Starting next year, individuals can contribute up to $22,500 to their 401(k) plans, a $500 rise from the previous cap. However, the "catch-up" contribution limit for those aged 50 and over will remain unchanged at $7,500.
The adjustment means that older workers have the potential to save as much as $30,500 in a traditional pretax 401(k) in 2024, thereby reducing their taxable income. David J. O’Brien emphasized the substantial benefits that high-earning younger savers could reap over time by taking advantage of this extra $500 annual allowance.
The increase also applies to similar retirement savings plans like the 403(b) and the thrift savings plan available to federal employees. Vanguard's data indicates a growing trend in retirement plan participation, with an 83% participation rate in 2022 compared to just 72% five years prior.
Despite this positive trend among certain income groups, Vanguard's report also sheds light on a disparity in savings rates across different earnings brackets. While over 95% of workers earning above $150,000 contributed to their plans, less than half of those earning below $15,000 did so. Alicia Munnell pointed out that the system seems to disproportionately benefit higher earners.
Financial experts are advising individuals to at least match their employer’s maximum contribution to fully benefit from company-sponsored retirement plans. Both Ms. Alt and Kyle McBrien recommend a strategic approach to saving that balances present needs with future financial security. McBrien suggests starting with modest contributions and increasing them incrementally each year.
Lastly, it's important to note a recent update regarding the Secure 2.0 Act. The act initially mandated that high earners make their "catch-up" contributions as after-tax Roth contributions starting in 2024. However, the IRS has now postponed this requirement until 2026. In another move aimed at encouraging retirement savings, the IRA contribution limit will be raised to $7,000 next year.
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