401k contribution limits for 2023 & 2024: saving for retirement

Let's be real, it's nobody's goal to work forever, and we all seem to count down to retirement, but how can we use our earnings in the meantime to plan for retirement and set ourselves to reap the benefits later?

Investing in 401k accounts either through your employer, or on your own if you are working as an independent contractor or freelancer, is critical to planning for your future, building wealth, and making your earnings and money work for you now, so you can enjoy retirement without stress.

What is a 401k?

Simply put, a 401k is your retirement fund - it's the money you get to pull from and live on once you're not longer working. When you work for an employer and sign up for a 401k plan, you agree to have the company take a percentage of your paycheck, pre-tax, and put it into your 401k. Some employers will match what you contribute out of your paycheck and also put that amount into your plan.

There are two types of 401k plans, a traditional and Roth, they are similar but the main difference is how they are taxed. 401k plan contributions are pre-tax, so these contributions reduce your taxable income, but when you withdraw this money, it's taxed. In comparison, a Roth 401k contribution is after tax, so it doesn't reduce your taxable income for the year but you also aren't taxed on withdrawals.

The goal of 401k plans are to encourage you to save for retirement. You don't want to work forever, but you want to make sure that your finances are in a place that allow you to enjoy it once you reach full retirement age, or before!

What are the employee contribution and employer contribution limits for 2024?

Employee contribution limits

In 2024, this contribution limit will increase to $23,000 for employee contributions in addition to the $7,500 catch up contributions if you're 50 or older.

This is why it's so imperative to create and contribute to your 401k retirement plans, your earned income has the potential to turn into tax free growth - depending on how you invest and the type of account you chose. Your ordinary income can only do so much, but 401 k plans give you the ability to reach your retirement goals.

Employer contribution limits

In 2024, the 401k contribution limit is at $69,000 for employee and employer, combined, contributions plus the $7,500 catch up contributions.

You want to take full advantage if your company offers 401 k matches or contributions, this will only increase your total contribution and leave you sitting pretty for retirement. Different employers have different match amounts or percentages, but whatever that percentage or amount is, it's important to take advantage of it.

Maximizing your 401k contributions

Building a future of wealth means that contributing to 401k accounts is critical, but how can you maximize your contributions?

Start early

Freedom plans (Retirement plans) can start as soon as you are 18, so keep that in mind those of you with kids as you'll want them to have this information to start contributing to their retirement plans early. If you didn't start at 18, there is still time - starting to contribute is the first step. The longer you give your 401k accounts to grow, the more you will have once you reach full retirement age.

Taking advantage of 401k matches

If your company offers a 401k match, you need to take advantage of that ASAP! How much your employer contributes or matches can vary, but it's typically $0.50 or $1 for each $1 you put into your 401k. So let's say you contribute $16,000 - your employer will potentially contribute an additional $16,000 - turning your $16,000 into 32,000.

Contribute at least 15% of your income

This sounds like a lot, but you can start small and work your way up to that 15% by increasing the amount you contribute every year. The goal though, is to make it to that 15% to get the most out of your contribution and set your 401k plan up for success.

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How much should I save to plan for retirement?

There is no right or wrong answer when it comes to how much to save for retirement, as long as you're putting money in there and growing your account, that's what matters. However; you should be contributing at least 15% in order to benefit from your 401 k when the time comes.

That being said, the first step to saving for retirement is to make sure your other finances are in order and you have an emergency fund saved up - you can't grow your retirement account if your income is held up by credit card debt and loans.

401k Match

I briefly talked about the 401 k match that most employers have, but why is taking advantage of this so important for your retirement account? The most important thing to remember is that you don't want to count employer contributions as part of your 15% investment - think of this as extra towards your retirement. You want to be contributing the 15% yourself from your earnings.

Think about it this way, if you have a regular savings account and your employer said for every $1 you put into that savings account we'll match that by putting in $1 of our own money. Hello? that's a no brainer, if your employer is giving you money towards a savings account and all you have to do is put money in from your paycheck first, why wouldn't you take advantage of that?

Roth IRA contributions

Roth IRA stands for Individual Retirement Account, and it lets you contribute and withdraw tax free. It's great to have both a 401 k and a Roth IRA in order to truly maximize your contributions and your retirement accounts. This IRA is separate from your 401 k that your employer offers, so it's another retirement account for you to contribute to, ensuring you reach that 15% goal.

Now, let's talk about the contribution limits for 2023 and 2024 to your Roth IRA. In 2023, the contribution limit is $6,500 for individuals under 50, but an additional $1,000 catch up contribution for people 50 and older. In 2024, the contribution limit increases to $7,000 for those under 50, but an additional $1,000 catch up contribution for people 50 and older.

For a Roth IRA, however, your tax filing status can impact what you can contribute. For example, married couples filing jointly making more than $228,000 are not eligible to contribute to a Roth IRA at all; but those making more than $218,000 but less than $228,000 can contribute a partial percentage of their income. Finally, those that are making less than $218,000 combined, can contribute the full amount of $6,500 for 2023, and $7,000 for 2024.

Is there an income limit for making contributions to a 401k?

There isn't necessarily a "limit", but the IRS limits how much of your yearly salary, as well as what you contribute to your 401 k plans are eligible for a 401 k match. In 2023, this limit increased from $305,000 to $330,000.

What your employer is able to match depends on their percentage as well as how much you contribute relative to the $330,000 maximum. So, if you make $500,000 in 2023, and you contribute $22,500 and your employer has a 4% match policy. They are only able to contribute $13,200 because they are only able to apply the 4% match on up to $330,000, so they can only contribute $13,200 to your 401 k.

A 4% match of $500,000 would be $20,000 - but they can only match up to that $330,000 and 4% of $330,000 is $13,200.

Let's Recap

I covered a lot on 401k contributions for 2023 and 2024, so let's go over what was covered and sum it up to make it easier to digest. Your 401k plans are your retirement funds, and how you're going to pay for your lifestyle once you stop working. That being said, it's important to have a 401 k and contribute to it as much as you can to ensure you don't have to be working forever and can set yourself up for success in retirement.

For 2023, the contribution limit increases from $20,000 to $22,500 and for 2024 it increases to $23,000. So, you can contribute up to $22,500 into your 401 k plans in 2023 and up to $23,000 in 2024. Now, your employer may also have 401 k matches that allow them to match your contributions up to a certain limit of income. The IRS only allows employers to match up to $330,000 of your income in 2023, so if you're contributing the maximum contribution for the year, your employer will not be able to match your contribution if it will go over the $330,000 limit the IRS has in place.

Make sure you're taking a look at your 401 k and paying attention to contributions to maximize your retirement plan for the future!