Maximize Your Retirement Savings in 2024: Key IRS Adjustments to Know
Saving for retirement just got a bit easier—and potentially more lucrative—thanks to new cost-of-living adjustments (COLA) announced by the IRS for 2024. These adjustments, designed to counteract the impacts of inflation, will allow Americans to contribute more to their tax-advantaged retirement accounts. Whether you’re just starting your retirement savings journey or a seasoned saver looking to maximize your contributions, these updates offer valuable opportunities to enhance your financial security.
Understanding Cost-of-Living Adjustments and Why They Matter
Each year, the IRS evaluates and adjusts contribution limits for retirement accounts to help protect against the eroding effects of inflation. This process, known as the Cost-of-Living Adjustment (COLA), ensures that the purchasing power of your retirement savings stays strong even in the face of rising costs.
In 2024, these changes mean you can save more in various retirement accounts, from employer-sponsored 401(k) plans to individual retirement accounts (IRAs). For high-income earners and older savers, these adjustments provide additional room to grow tax-advantaged savings and make strides toward financial independence.
Major Changes for 2024 Retirement Savings Limits
Let’s dive into the specific updates for 2024, which include substantial increases for several types of retirement plans.
Defined Benefit Plans
For those enrolled in traditional pension plans, also known as defined benefit plans, the annual benefit limit has increased to $275,000, up from $265,000. This increase can benefit higher-income individuals who rely on these plans for retirement income, especially in sectors where defined benefit pensions are still common.
Defined Contribution Plans (401(k), 403(b), etc.)
In 2024, the IRS raised the maximum allowable contribution to defined contribution plans—such as 401(k)s, 403(b)s, and profit-sharing plans—from $66,000 to $69,000. This adjustment means more tax-free or tax-deferred savings potential, especially for employees whose employers offer substantial matching contributions.
Elective Deferrals and Catch-Up Contributions
Good news for those with a 401(k), 403(b), or similar plan—the elective deferral limit has increased from $22,500 to $23,000. This change allows employees to put a bit more aside directly from their paychecks. While catch-up contributions for those aged 50 and older remain unchanged, this limit still provides valuable savings potential for older workers looking to boost their retirement security.
Adjusted Income Limits for IRA Contributions
The IRS also raised income thresholds for both traditional and Roth IRAs, making these savings vehicles accessible to a broader range of earners:
- Traditional IRA Deductibility: For single filers who are active participants in an employer plan, the income phase-out range is now $77,000 to $87,000, up from $73,000 to $83,000.
- Roth IRA Contributions: Married couples filing jointly can now contribute to a Roth IRA with an income of up to $240,000 (up from $228,000), while the limit for singles is $161,000.
These changes are particularly helpful for individuals and couples with higher incomes, allowing for continued contributions to IRAs despite income growth.
Special Updates for Key and Highly Compensated Employees
For employers offering top-heavy plans, the IRS defines “key” employees and “highly compensated” employees with specific criteria. The new income limit for a “key employee” in 2024 is $220,000 (up from $215,000), while the compensation threshold for “highly compensated employees” has risen to $155,000.
How to Take Advantage of These Changes
- Review Your Contributions: If you’re nearing any of these limits, consider increasing your contributions to capture the full tax benefit.
- Optimize Your IRA Strategy: With higher phase-out ranges, IRAs remain a powerful tool. If you’ve been phased out before, check if you now qualify.
- Consult a Financial Advisor: These annual adjustments present an opportunity to revisit your retirement strategy. Talking to a financial advisor can help ensure you’re leveraging every available benefit.
Conclusion
The IRS adjustments for 2024 make it easier to save more, and every dollar you put away can make a difference in your retirement years. By staying proactive and taking advantage of these changes, you’re setting the stage for a more secure financial future.
