For an employee in the United States of America, 401(k) plan can be one of the most effective ways to fund their retirement benefits. But first, let’s understand what is 401(k) plan? The term 401(k) plan refers to the retirement savings plan responsible to provide tax benefits to the employees in their retirement age. The employees can invest a portion of their income which is tax deferred in stocks, bonds and other securities to the 401(k). In simple words, an elective deferral contribution is made from an employee’s pay check to an employer’s sponsored retirement plan which is 401(k). According to a report by the Investment Company Institute, approximately 70 million Americans contribute to 401(k) plan as of September 2023 through their pay checks.
The 401(k) plan is categorized into two types: Traditional and Roth which may vary with each other on certain terms. Meanwhile, the Internal Revenue Service (IRS) has set a maximum limit that you can contribute to the 401(k). As you have contributed a portion of your income, you can receive your benefits in your retirement years. However, you can also make additional contributions to 401(k) after you have turned 50 or above which is known by catch-up contributions. Through this post, you can gain the latest insights on IRS 401(k) contribution limits in 2024 as compared to 2023 along with its major types and how can you start 401(k).
IRS 401(k) Contributions Limits
As previously mentioned, an employee can contribute to 401(k) based on a certain limit set by the IRS. If we look at the previous year’s data, the maximum 401(k) contributions limit in 2024 is slightly higher. The IRS has set a maximum 401(k) contribution limits up to $23,000 in 2024 which was $22,500 in 2023. On the other side, if an employee is permitted by 401(k), then one can make the catch-up contributions at the end of a calendar year. The catch-up contribution limits of 2024 are set at $7,500 which is same of the previous year.
Apart from that, contributing in 401(k) plan has another benefit for your retirement age which is; an employer will also contribute to 401(k) on an employee’s behalf. Under this, the income of the employees will not affect the contributions made by the employer. However, as per the IRS’ guidelines, an employer can contribute up to a certain limit. In 2024, the maximum combined employee and employer limit is $69,000 which was $66,000 in 2023. Apart from it, if we add the catch-up contribution limits in it, the maximum limit for an employee with 50 years of age or above turns out to be $76,500 in 2024 which was $73,500 in 2023. To prevent the unfair benefits from 401(k) for the wealthier employees, the IRS uses actual deferral percentage test (ADP). You can check the IRS 401(k) contribution limits in the following table:
| Contribution plan | In 2024 | In 2023 | In 2022 |
| Employee elective deferral | $23,000 | $22,500 | $20,500 |
| Employee catch-up contribution | $7,500 | $7,500 | $6,500 |
| Employee employer limit | $69,000 | $66,000 | $61,000 |
| Employee employer limit (Catch-up) | $76,500 | $73,500 | $67,500 |
Major Types of 401(k) Plan
The 401(k) plan is categorized into two major parts which are; Traditional 401(k) and Roth 401(k):
- Traditional 401(k): With the traditional 401(k), an employee makes a contribution of their pretax wages from their pay checks into retirement account. It means, when you will get your retirement benefits, the amount will be withdrawn from the account after tax deduction. The traditional 401(k) plan is subjected to annual non-discrimination tests created by the IRS to determine if the benefits provided to the eligible employees are fair or not.
- Roth 401(k): Unlike traditional 401(k), an employee makes a contribution of a portion of their income after your tax deduction from your pay check. It will allow an employee to receive the full retirement benefits from 401(k) without any tax deduction at the time of withdrawal.
- Simple 401(k) Plans: The simple 401(k) plans are designed for small businesses with 100 or less employees. Under this, employers are required to make employer contributions that are fully vested. The foremost purpose behind this plan is to make sure that small businesses can have effective and cost-efficient way to provide retirement benefits to the employees. Unlike traditional 401(k) plan, simple 401(k) is not subject to annual non-discrimination tests.
- Safe Harbor 401(k) Plans: The safe harbor 401(k) is similar to traditional 401(k) except for the employer contributions are required whether an employee contributes or not. Similar to simple 401(k), the safe harbor is exempt from the non-discrimination tests that is applied to traditional plan.
- SOLO 401(k): The solo 401(k) is designed for self-employed citizens having a small business run by themselves or with spouse. It is also known as one-participant plan. The participant is eligible to enjoy the benefits of their retirement account without having an outside employer.
How Can You Start 401(k)?
Generally, the HR department introduces an employee with the 401(k) plan but it is up to you to manage the 401(k) if you want to take the advantage of it. You can start your 401(k) in five steps which are mentioned below:
- Sign up: Some employers automatically enrol the employees in 401(k) at a set percentage of their salary. On the other side, other employers ask the employees to enrol themselves immediately or after a certain period of time. You can enrol in 401(k) which will allow you to increase, lower or pause your contributions any time you wish.
- Set a contribution amount: You can set any amount you wish but you must be aware of the maximum contributions limit by IRS in 2024. The limit has reached to $23,000 in 2024. However, the percentage of your contributions will depend on your salary, thus, it is advised to choose carefully that does not lead to an exceed in the contribution limit.
- Take advantage of employer’s contributions: Some employers contribute to 401(k) on behalf of their employees around 3 to 5 percent. You are allowed to take advantage of this extra money.
- Choose your 401(k) types: The 401(k) plan has two major plans which have their own advantage. You must consider all the pros and cons of Traditional and Roth 401(k) plans before choosing the best type for your retirement benefits.
- Choose your investments wisely: As of FINRA, the 401(k) plan offers around 12 investments options which you can choose to invest in. The mutual funds are the best option you can consider to invest in. In addition to it, stocks and bonds, guaranteed investment contracts and other securities are also available.
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As a Editor at Sass News Portal ,Lara skillfully combines her knowledge of political economy and personal finance to empower readers with crucial insights and answers to their most pressing questions. With her finely honed analytical skills and a commitment to providing accurate coverage of today’s pressing issues, Lara strives to engage readers across a wide range of topics.