The Internal Revenue Service (IRS) has some excellent news for people wishing to boost their retirement savings.
The IRS recently announced an increase in the contribution limits for 401(k) and Individual Retirement Accounts (IRAs) for the year 2024. This means that if you’re in a position to save more for your retirement, you’ll have the opportunity to do so.
Maximizing Tax Benefits for Your Retirement Savings
Increases to the 401(k) Contribution Limit: You can now contribute up to $23,000 in tax-advantaged funds toward your retirement account, giving you an additional $500 in tax benefits. The current limit was $22,500. In addition, people 50 years of age and older are eligible for “catch-up contributions” of up to $7,500, which increases the maximum amount they can contribute to $30,500.
These limits also apply to 403(b) plans, most 457 plans, and the federal government’s Thrift Savings Plan, offering federal employees the same opportunity to save more for retirement.
Tax-Deferred vs. Roth 401(k): When contributing to a 401(k), most people opt for the tax-deferred option, where your contributions are not subject to income tax in the year you make them. However, withdrawals during retirement are subject to income tax.
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Traditional vs. Roth IRAs: Weighing the Tax Implications
Alternatively, some employers offer a Roth 401(k) option, where contributions are subject to income tax the same year you make them. The benefit is that withdrawals in retirement are tax-free, potentially providing a tax advantage down the road.
Increased IRA Contribution Limits: The annual contribution limit for IRAs is also increasing from $6,500 to $7,000. If you’re 50 or older, you can contribute an additional $1,000, raising your total allowable contribution to $7,500.
Just like with 401(k) contributions, traditional IRAs allow for tax-deferred contributions, while Roth IRAs require you to pay income tax on contributions made in the year. However, withdrawals from a Roth IRA in retirement are tax-free.
Income Limits for Traditional and Roth IRAs: Keep in mind that not everyone is eligible for tax breaks when contributing to traditional or Roth IRAs. The income limits for tax-deductible contributions to traditional IRAs and eligibility for Roth IRAs have also changed. These limits may disqualify high-income individuals from enjoying these tax benefits.
Saver’s Credit for Moderate- and Low-Income Workers: Lastly, don’t forget about the Retirement Savings Contributions Credit, commonly known as the Saver’s Credit. This tax credit is designed to assist moderate- and low-income workers in saving for retirement. Depending on your income and contributions, you could reduce your federal income tax liability by up to $2,000.
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