IRS Increases 401(k) Limits

The IRS is increasing the amounts employees can contribute to their corporate retirement plans for 2024. These increases apply to 401(k) limits, 403(b), and most 457 plans as well as the federal government’s Thrift Savings Plan. 

401(k) Limits via Employer-Sponsored Plans

In November 2023, the IRS announced the 401(k) limits would increase for employer-sponsored retirement plans for the year 2024 to $23,000, which is an increase of $500 from the $22,500 limit in 2023. The limit for combined employee and employer contributions is $69,000. There is also an increase of $500 in the annual contribution limit to an IRA, making it $7,000 from $6,500 in 2023 as well as increases in the catch-up contribution limits for employees aged 50 and over who participate in 401(k)s, 403(b)s, and most 457 plans.

In 2024, individuals can contribute up to $23,000 to a plan provided by their employer. These plans are included in the increased limit:

• 401(k)
• 403(b)
• 457
• Federal government’s Thrift Savings Plan

If you are over 50, you can use the catch-up contribution in most plans to contribute up to $30,500. These are pre-tax contributions that are made by employees into their retirement plans. From a tax standpoint, there are two benefits:

• Earnings don’t count toward regular income in the current year, therefore reducing your tax bill.
• The amount in the IRA grows tax-deferred, meaning you don’t pay tax until you make withdrawals.

401(k) Limits in Regards to Individual Retirement Accounts

In addition to 401(k) limits, annual contributions to an Individual Retirement Account (IRA) increased to $7,000 in 2024, an increase of $500 from $6,500 in 2023. This limit applies to the total amount contributed to both your traditional and Roth IRAs. IRAs also allow catch-up contributions for individuals over 50 years of age.

Traditional IRAs

Contributions into a traditional IRA are tax-advantaged. If you meet the criteria, contributions are tax-deductible, serving to reduce your taxes. Just like with a corporate-sponsored retirement plan, the earnings inside an IRA grow tax-deferred and are only taxed when you withdraw money from the account.

Phase Outs for Tax Deductibility

If you or your spouse were covered by a retirement plan at work, your tax deduction may be reduced (phased out) until it is eliminated, depending on your filing status and income. This is a gradual reduction of the upper-income limit to qualify for the tax credit. A taxpayer with an income at the lowest end of the range may be eligible for the maximum amount of the tax credit, whereas a taxpayer whose income falls on the highest level of the income range may only be eligible for the minimum amount. 

There may be additional increments between the upper and lower limits that are used to determine the amount of a specific tax credit a taxpayer may be eligible for, based on their reported income for the tax year. When a taxpayer’s income exceeds the upper limit, they may become ineligible for the credit. It is important to note that if neither spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.

Here are the phase-out income ranges for 2024:

• For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $77,000 and $87,000 in 2024. This is increased from $73,000 and $83,000 in 2023.
• For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $123,000 and $143,000 in 2024. This is increased from $116,000 and $136,000 in 2023.
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to between $230,000 and $240,000 in 2024. This is increased from $218,000 and $228,000 in 2023.
• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range remains between $0 and $10,000.

Roth IRA Plans

In terms of tax, Roth IRAs are treated much differently than traditional IRAs. Contributions to a Roth IRA are not tax deductible when they are made. However, qualified withdrawals are tax-free, as long as you meet the criteria. If you have owned your account for five years and you have reached age 50 ½ or more, those withdrawals are not taxed. The money that you have contributed has already been taxed, but the growth of the investments is not taxed. 

Phase Outs for Tax Deductibility

Income phase-outs also apply to Roth IRAs. These are the increases for 2024:

• For singles and heads of households, the income phase-out range is between $146,000 and $161,000. This is an increase from $138,000 and $153,000 in 2023. 
• For married couples filing jointly, the income phase-out range is increased to between $230,000 and $240,000 in 2024. This is increased from $218,000 and $228,000 in 2023.
• For married individuals filing a separate return, the phase-out remains between $0 and $10,000.

SIMPLE Retirement Accounts

A Savings Incentive Match Plan for Employees (SIMPLE) is a retirement vehicle for small businesses that are not currently sponsoring a retirement plan to contribute to IRAS. Unlike the 401(k) limits, the amount that individuals can contribute to a SIMPLE retirement account is increased to $16,000 in 2024, up from $15,500 in 2023. The catch-up contribution limit for employees 50 and over who participate in a SIMPLE IRA plan is an additional $3,500 for 2024 for a total potential contribution for employees over 50 to $19,500.

Defined Benefit Plans

Although defined benefit plans are not as popular as they once were, they still exist for some businesses that take the deductions on the employer side that are available for contributions. In 2024, the limit on the annual benefit under a defined benefit plan increases to $275,000, up from $265,000 in 2023.

Contact Our CPAs for More Information on 401(k) Limits & Retirement Accounts

At Steward Ingram & Cooper, PLLC, our Raleigh and Durham CPAs can inform and guide clients on retirement planning. We encourage you to reach out to us today as you are planning your retirement contributions and budgeting for 2024. We serve areas throughout North Carolina including Raleigh, Wake Forest, Wilson, Apex, Durham, and Cary. To schedule a consultation, call us at  (919) 872-0866 or complete the contact form below.