Free Guide to 401k Contribution Limits and Savings

Understanding 401(k) Contribution Limits for 2024

A 401(k) is a retirement savings plan offered by many employers. Workers can set aside money from their paychecks before taxes are taken out, which reduces their current taxable income. The Internal Revenue Service (IRS) sets annual limits on how much workers can contribute to these accounts each year.

For 2024, the basic contribution limit for 401(k) plans is $23,500 per year for workers under age 50. This represents an increase from the 2023 limit of $22,500. These limits apply to traditional 401(k) accounts and Roth 401(k) accounts, though the rules governing each type differ in important ways.

The contribution limits include both employee contributions and employer matching contributions combined. If your employer matches your contributions, that matching money counts toward your annual limit. For example, if you contribute $15,000 and your employer matches with $3,000, your total contribution for the year is $18,000, leaving $5,500 of your limit unused.

These limits change periodically, typically adjusted for inflation in $500 increments. The IRS announced the 2024 limits in October 2023 to give workers and employers time to plan. Understanding these caps helps you make informed decisions about how much to save each year.

The contribution limit applies to the total of all 401(k) accounts you may have with different employers. If you work for two companies during the same year, your combined contributions across all plans cannot exceed the annual limit. Contributions beyond the limit may face tax penalties, making it important to track your total savings across multiple employers.

Practical takeaway: Review your current 401(k) contribution rate and your employer's matching formula. Calculate whether you are using the full contribution limit available to you, or whether you could increase your retirement savings within the allowable amount.

Catch-Up Contributions for Workers Age 50 and Older

The IRS recognizes that workers approaching retirement may want to save additional amounts beyond the standard contribution limit. For this reason, workers who reach age 50 during the calendar year are permitted to make "catch-up" contributions to their 401(k) accounts.

The catch-up contribution limit for 2024 is $7,500 per year for workers age 50 and older. This means a worker age 50 or older can contribute up to $31,000 total in 2024 ($23,500 standard limit plus $7,500 catch-up). This rule exists in the tax code specifically to help older workers boost their retirement savings during their final working years.

To make catch-up contributions, you must be at least 50 years old by December 31 of the year you want to make the contributions. If you turn 50 in December, you are permitted to make catch-up contributions for that entire year. Your employer's 401(k) plan must also offer catch-up contributions, which most plans do, but it is worth confirming with your plan administrator or human resources department.

Like regular contributions, catch-up amounts are deducted from your paycheck before income taxes are calculated. This reduces your taxable income for the year in which you make the contributions. If you have a Roth 401(k), catch-up contributions work the same way, though they are made with after-tax dollars and grow tax-free.

The catch-up contribution limit has increased over time as inflation adjustments have been applied. In 2006, the catch-up limit was $5,000. By 2024, it had grown to $7,500, reflecting the inflation adjustments built into tax law. This growth helps ensure that older workers' ability to save for retirement keeps pace with rising costs.

Practical takeaway: If you are age 50 or older, calculate how much additional savings you could accumulate by making the maximum catch-up contribution over the next 10 to 15 years. Even modest catch-up contributions can add meaningful amounts to your retirement savings over time.

How Employer Matching Works Within Contribution Limits

Many employers offer matching contributions as a way to encourage employees to save for retirement. A typical matching formula might be 50% of the first 6% of your salary that you contribute, or 100% match on the first 3% of your salary. These matching amounts count toward your annual contribution limit, not in addition to it.

For example, suppose you earn $60,000 per year and contribute 6% of your salary to your 401(k), which equals $3,600. If your employer offers a 50% match on the first 6% of salary, they will contribute $1,800 (50% of $3,600). Your total contribution that year is $5,400, which is well within the $23,500 annual limit.

Understanding your employer's matching formula is important for retirement planning. If your employer matches contributions, you should generally try to contribute enough to receive the full match, as this is essentially free money being added to your retirement account. Failing to contribute enough to capture the full match is equivalent to leaving money on the table.

Employer matching contributions are treated differently for tax purposes than your own contributions. Your own contributions reduce your taxable income in the year you make them. Employer matching contributions are not considered income to you, and they also are not taxed in the year they are made. However, when you withdraw the money in retirement, both your contributions and the employer match are taxed as ordinary income (in a traditional 401(k)).

Some employers offer matching contributions on a discretionary basis, meaning they decide each year whether to provide a match. Other employers offer a non-elective contribution, which means they contribute a set percentage of salary for all workers regardless of whether the workers contribute their own money. These arrangements vary widely, and reviewing your plan documents or speaking with your benefits administrator can clarify what your employer provides.

A few employers offer matching formulas that are more generous than typical. For instance, some companies match 100% of the first 4% or 5% of salary. The more generous the match, the greater the benefit of contributing enough to capture it.

Practical takeaway: Locate your employer's matching formula in your 401(k) plan documents or benefits summary. Calculate the exact dollar amount you need to contribute to receive the full match, and ensure your payroll contributions are set to at least that level.

Traditional 401(k) Versus Roth 401(k) Contribution Limits

Most employers that offer a 401(k) plan allow workers to choose between a traditional 401(k) and a Roth 401(k), or sometimes both. The contribution limits apply the same way to both types, but the tax treatment differs significantly, which affects how much money you have available to save.

With a traditional 401(k), your contributions are made with pre-tax dollars. If you contribute $10,000 to a traditional 401(k), your gross income is reduced by $10,000, lowering your income tax bill for that year. If you are in the 22% federal tax bracket, contributing $10,000 costs you only $7,800 out of your actual paycheck because the tax savings are approximately $2,200.

With a Roth 401(k), your contributions are made with after-tax dollars. If you contribute $10,000 to a Roth 401(k), that $10,000 is taken from your paycheck after taxes have been calculated, so it does not reduce your taxable income that year. However, the money grows tax-free, and withdrawals in retirement are also tax-free, provided certain conditions are met.

The total contribution limit of $23,500 for 2024 applies to your combined contributions to both types of accounts. You cannot contribute $23,500 to a traditional 401(k) and another $23,500 to a Roth 401(k). Instead, your total contributions across all 401(k) accounts you maintain, whether traditional or Roth, cannot exceed $23,500.

Many financial advisors recommend considering your current tax bracket and expectations about your tax bracket in retirement when deciding how to split contributions between traditional and Roth accounts. If you expect to be in a higher tax bracket in retirement, a Roth 401(k) may provide greater tax savings. If you