While inflation may be stressing workers’ budgets, it also brings some good news for those looking to maximize their contributions to retirement accounts. If you are looking to get on track to becoming a 401(k) millionaire or achieving financial freedom, the IRS has just announced the new 2024 401(k) contribution limits.
Workplace Retirement Plan Contribution Limits for 2024
For those with a 401(k), 403(b), or 457 plan through an employer, your new maximum contribution limit will go up to $23,000 in 2024. This amount is an increase of $500 from the 2023 401(k) contribution limits.
Catch-up contributions will not be increasing in 2024. Workers 50 or older in 2024 can make an additional $7,500 catch-up contribution. This dollar amount is the same as in 2023. That means a total of $30,500 can be contributed as an employee of a business.
The employer’s 401(k) maximum contribution limit for the self-employed is even bigger. Altogether, the most that can be contributed to your 401(k) plan between you and your employer is $66,000 in 2023. This amount will be increasing to $69,000 in 2024. Additionally, business owners 50 or older can make the $7,500 catch-up contribution for a total of $76,500.
Cash Balance Plan Contribution Limits in 2024
The cash balance plan is my favorite tax-planning tool for high-income business owners. There is no set contribution limit like a 401(k). However, inflation will increase the maximum amount you can contribute to a cash balance plan in 2024.
Your actual allowable contributions each year will be actuarially calculated based on the promised benefits of the pension, the participant’s age, and the plan’s current funding. In 2024, a pension plan’s maximum allowable defined benefit increases from $265,000 to $275,000 of retirement income per year.
If you are making $500,000 or more per year from your business and would like to save more on a pre-tax basis for retirement, talk with your tax professional and tax-planning financial advisor to see if you could benefit from setting up a cash balance pension plan. If they don’t have the ability or expertise to help you set up a Cash Balance Plan, look for a financial planner who can.
Review what you currently contribute to your retirement accounts and strive to increase your contributions yearly. This is especially important if your income is also growing each year. When planning for an amazing retirement, don’t assume that just because you are meeting the retirement account contribution limits each year, you are saving enough to ensure a retirement income you can’t outlive.
If nothing else, use the tax savings from your pre-tax contributions to your 401(k), cash balance pension plan, or profit-sharing plans as motivation to increase the amount you save each year. Your contributions could mean tax savings in the tens or hundreds of thousands of dollars over the next decade. For the high-income earning business owners reading this, the tax savings could be in the millions of dollars if you optimize the benefits of both a profit-sharing and a cash balance pension plan.
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