The Maximum Amount You Can Contribute To Your 401(k) In 2024

If you're getting a head start on your taxes, savings, or even just personal budgeting for the new year, you might be interested to know about upcoming changes to your 401(k) contribution limits. Even though the IRS has not formally announced the contribution limit yet for 2024 (this usually happens in late October/early November of the fall prior to the year in question), experts have been able to calculate the cost of living and inflation markers to determine a projected 2024 contribution limit of $23,000. This can have a major impact on your finances, especially in the long term.

If you're unclear as to why exactly these contribution limits exist, it's important to know that these limits are put in place by the Internal Revenue Service (IRS) and apply to everyone contributing to a 401(k) or 403(b). By limiting the amount of money an individual can place into their 401(k) in a single year, the IRS can better regulate the amount of tax advantage an individual can claim. Plus, since 401(k) contributions are tax-deferred, limiting an individual's contribution amount can prevent any excessive tax-deferred savings. These contribution caps can also help to ensure that tax benefits are distributed more equitably among taxpayers across multiple income levels.

While the 2024 projections for 401(k) and 403(b) contributions are still significant, it's important to note that it will be a smaller increase than in the past few years. For instance, the contribution limit jumped $1,000 between 2021 and 2022 before jumping another $2,000 in 2023 to the current $22,500 limit. If projections hold true at a $500 increase for 2024, it will be the smallest jump since before the pandemic. This is mainly due to the IRS's calculations of cost-of-living and the Consumer Price Index, which have shown a slowing in inflation over the past year.

The reason the contribution limit changes depending on the year has to do with both inflation and the overall economic conditions in a given year. The theory is that, by making these adjustments, the IRS is helping to maintain the value of your contributions over time. It's also important to know that going over the set contribution amount can lead to not only having to pay immediate taxes on the excess funds but also getting taxed again on this already-taxed money when you eventually pull the money out.

401(k) contribution limits don't mean you can't save and grow your money in other ways. It's important to pay close attention to any employer-matching contributions offered that could further help you grow your savings and retirement funds. While IRAs (and Roth IRAs) also face yearly contribution limits, they can be an important option for anyone who doesn't have a workplace-sponsored 401(k) program to contribute to. They can also serve as a secondary retirement plan for anyone looking to save more than their 401(k) contribution limit allows them to. The anticipated 2024 IRA contribution limit will be $7,000 with an extra $1,000 allowed as catch-up contributions (for those over 50).

If you're looking for a shorter-term way to grow your money that won't leave you tied up until you retire, you have some great options. A high annual percentage yield (APY) certificate of deposit (CD) can help you grow your money within a significantly shorter time frame. CDs are essentially a type of savings account that has fixed rates of return (depending on your agreed APY) in a specific time frame (which can range anywhere from three months to five years). They typically offer higher APY rates than normal savings accounts. With that being said, there are increasingly more options in the high-yield savings account arena, with some savings accounts offering over 5% APY. Researching a good high-APY savings account can also help you grow your money, albeit more modestly, while maintaining easier access to your money.