New 401(k) Limits Likely to Help Older Americans Most

Older workers who can afford it can save as much as $30,500 in 2024, bolstering their nest eggs while reducing their taxable income.

By Ann Carrns

Those with enough means will be able to save more money in their workplace retirement accounts next year.

Individuals will be allowed to contribute up to $23,000 to 401(k) retirement plans in 2024, up from $22,500 this year, under cost-of-living increases announced by the Internal Revenue Service this month.

The $500 increase — just over 2% — was adjusted for inflation. It is more modest than the almost 10% jump in the contribution limit for 2023 because inflation, while still elevated, has been cooling. The cap on extra “catch-up” contributions that people 50 and older can make will remain $7,500.

“The vast majority of Americans likely can’t make that full contribution amount,” said Joni R. Alt, a senior wealth adviser at Evermay Wealth Management in Arlington, Virginia.

Still, the new limits will mean older workers who can afford it can save as much as $30,500 next year, bolstering their nest eggs while reducing their 2024 taxable income (assuming they contribute to a traditional, pretax 401(k), rather than the increasingly available Roth version, which gets after-tax contributions).

And while an extra $500 isn’t much to some, it can make a difference, particularly for high-earning younger savers, said David J. O’Brien, a certified financial planner in Richmond, Virginia. He noted that $500 invested annually starting at age 30 could grow to almost $52,000 by age 65.

“Time,” he said, “is on their side.”

The new higher limits for 401(k)s also apply to similar workplace plans like 403(b)s, offered at many nonprofits and universities, and the thrift savings plan for federal workers. The retirement accounts, named for parts of the tax code, allow employees to have contributions automatically deducted from their paychecks. Employers often match a share of contributions to encourage participation.

More people with access to 401(k) plans are participating in them than just a few years ago, according to a report from the investment management company Vanguard, based on about 5 million participants in plans it oversees.

About 83% of people with access contributed in 2022, up from 72% five years earlier, Vanguard said. Part of the reason for the increase is that many employers now automatically enroll workers in the plans.

The average salary deferral was 7.4% in 2022.

Vanguard found that more than 95% of workers making more than $150,000 contributed, compared with fewer than half of those earning under $15,000.

Just 15% of participants in Vanguard’s retirement plans saved the maximum amount in their 401(k)s in 2022. They were mostly longer-tenured workers with higher incomes and account balances. Fifty-eight percent of participants earning more than $150,000 contributed the maximum, Vanguard said.

Alicia Munnell, director of the Center for Retirement Research at Boston College, said contributing to a 401(k) is important but added that ballooning contribution limits and generous catch-up provisions do nothing to help lower-income workers who need to save but can’t put that much money away.

“This is a system geared for high earners,” she said.

If you can’t max out your 401(k) contributions, investment advisers say, you should aim to contribute at least enough to earn your employer’s maximum matching contribution, if offered, because it is “free” money. So if your employer matches, say, 3% of your salary, contribute at least 3% yourself.

Deciding how much to contribute for your future depends on how much of your pay you need to live on now, Alt suggested. “Typically, it’s a balancing act,” she said. “Save some for today and some for tomorrow.”

Just be reasonably confident, Alt said, that you won’t need the funds you contribute to your 401(k) “for a very long time.” If you’re saving for something in the near future — a down payment on a house in three years, for example — saving cash outside a retirement plan is best.

While your goal should ideally be to save 10% to 15% of your income for retirement, don’t be discouraged if you can’t contribute at that level yet, said Kyle McBrien, a certified financial planner with Betterment, a financial services firm.

“It’s OK to start small,” he said. Aim to increase your contribution gradually each year.

Even if you can contribute the maximum amount, that doesn’t necessarily mean you should, McBrien said. If you haven’t built up an adequate rainy-day fund for surprise expenses or a job loss, for instance, that should take priority before you contribute to your 401(k) beyond your employer’s match.

“Replenish your emergency fund first,” he said.

You may have other goals to save for besides retirement, said Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute. Perhaps you have children and want to save for their education in a 529 college fund or want to contribute to a health savings account — a special account that can cover short-term medical needs or be invested for retirement.

“If you do have dollars to save,” he said, “think about where they should go.”

Here are some questions and answers about saving in a 401(k).

Q: Do extra 401(k) contributions have to be treated as Roth contributions if I’m a high earner?

A: Not yet. Under the Secure 2.0 Act, a law passed late last year, savers earning $145,000 or more who make 401(k) catch-up contributions would have had to make them as pretax Roth contributions starting in 2024. But this summer, the IRS delayed that provision for two years, after employers and plan administrators said they needed more time to prepare. (Not every 401(k) plan offers a Roth option.) So for next year and for 2025, at least, extra contributions for those 50 and older may be made pretax to a traditional 401(k), even for high earners.

Q: Can I change the amount of my 401(k) contributions after open enrollment?

A: The annual open enrollment period, when employees choose their benefits for the new year, is underway at many workplaces. But while health insurance choices are typically fixed for the full year unless you have a big change in your life, many employers let you tweak your retirement contributions at any time. (Check with your employer to be sure.) Note that after you make a change, it may take a paycheck cycle or two for it to take effect, said McBrien at Betterment.

Q: How much can I contribute to an individual retirement account for 2024?

A: The contribution limit for IRAs will be $7,000 next year, up from $6,500 this year. The catch-up contribution for people 50 and older remains $1,000. The limits apply to both traditional IRAs, which offer a tax deduction for contributions and are taxed on withdrawal, and to Roth IRAs, to which contributions are made after tax but from which funds aren’t taxed when withdrawn.

If you don’t have access to a 401(k) plan at work, you can open and contribute to an IRA on your own. Income limits apply for Roth contributions. In 2024, single filers won’t be able to contribute directly to a Roth if they make more than $161,000, up from $153,000 this year. For married filers, the income limit is $228,000 this year and will be $240,000 in 2024.

If you contribute to a workplace plan, you can have an IRA as well, but your tax deduction may be reduced or eliminated, depending on your income and your tax filing status.

c.2023 The New York Times Company. This article originally appeared in The New York Times.

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