What is the 401k Max Contribution for 2024? With Key Changes

Nowadays, financial security proves to be one of the most sought-after goals for employees in the US. After battling the pandemic and economic crises in the previous years, Americans learned the hard way that having a reliable retirement plan is an advantage.

Even the younger generation shares this same perspective as a recent report revealed that 65% of undergraduates claim they wouldn’t accept a job without employer-administered retirement benefits like a 401k plan.

But what is a 401k plan, exactly? How does it earn money? Are there pros and cons? And what is the 401k max contribution for 2024? Let’s find out!

What is a 401k plan?

A 401k plan is a retirement savings plan with tax advantages allowing employees to set aside a portion of their salary to an individual retirement account. These salary deferrals are pre-tax, therefore reducing an employee’s taxable income.

The terms of a 401k plan are provided and defined by the employer. There are instances when an employer may contribute to an employee’s 401k plan, a practice called a 401k match.

Now, there are two major types of 401k plans. Each has its differences and advantages that employees can choose to maximize:

• Traditional 401k: These are the usual 401k plans where employee contributions are made pre-tax. However, the withdrawal of benefits during retirement is taxed.

• Roth 401k: This is the exact opposite of a traditional 401k. With Roth 401ks, also known as Roth IRA, employees make "after tax contributions". Therefore, the withdrawals during retirement are considered "after tax money".

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How does 401k earn money?

When an employee decides to sign up for his own 401k plan, he agrees that his money will be used for certain investments to help grow its value throughout the years. The employee will be able to choose from different investments offered by his employer.

There are key factors that may affect an individual’s 401k plan such as his age, income, health risks, tenure, and more. Below are some examples of possible 401k investments:

• Mutual funds

• Insurance-investment contracts

• Company stocks

• Target-date funds

• Real estate funds

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What are the pros and cons of 401k?

401k plans also come with different advantages and disadvantages. An employee must know how to navigate these pros and cons to maximize the benefits of having a 401k plan:

Pros

• Flexible annual contributions: With 401k plans, employees can easily make contributions by depositing up to the annual contribution limit. When you’re over 50 years old, you can add even more contributions every year.

• Great retirement plan: Signing up for a 401k plan is a great strategy for retirement because it allows employees like moderate income workers to easily save up money while having tax advantages at the same time.

• Better investments: A 401k plan will use your money in low-risk investments such as mutual funds to grow its value throughout your employment years. This is a better investment option than other simple retirement accounts.

Cons

• Higher fees: Some 401k plans may incur higher fees such as early withdrawal penalties. According to the Internal Revenue Service (IRS), an employee would have to pay an additional 10% tax if he didn’t qualify for hardship withdrawal.

• Minimal 401k match: Some employers only offer a minimal 401k match, if not at all. They might only offer a small percentage or impose limits on 401k matches.

• Risky tax implications: Future tax rates are unpredictable; therefore, it would take a lot of work to ensure that your 401k plan will actually perform great.

What is the 401k max contribution for 2024?

The 401k max contribution for 2024 is $23,000, $500 higher than the 2023 limit of $22,500. Moreover, the 2024 limits for 401k catch-up contributions remain at $7,500, the same as in 2023.

Keep in mind that the catch-up contribution is only applicable to employees aged 50 years old and over. For example, a 55-year-old employee’s 401k max contribution for 2024 is $30,500. On the other hand, a 45-year-old employee’s 401k max contribution for 2024 should only be $23,000.

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401k max contribution for 2025

As of writing, the IRS also announced the 401k limit for 2025, which is now at $23,500. This is $500 higher compared to the 401k limits for 2024 of $23,000.

The 401 k catch up contribution limit for 2025 is $7,500, still the same as 401k limits 2024. Therefore, the maximum contribution for 401k beneficiaries aged 50 and older is now $31,000.

However, a recent provision under Secure Act 2.0 gives way to higher catch-up contributions for employees aged 60 to 63, which is $11,250. For instance, a 62-year-old beneficiary’s 401k max contribution for 2025 is now $42,250.

FAQs

Below are common questions about the 401k contribution limits 2024:

What does a 401k match mean?

A 401k match refers to the employer contributions to an employee’s 401k retirement plan. This could only be a partial or the full amount of your 401k contributions every month.

For example, Company AAA decides to give a partial 401k match of 25% to an employee. If he contributes $200 to his 401k plan, then Company AAA should contribute $50 to honor the 401k match.

How much are the 2024 limits for 401k catch-up contributions?

According to the IRS, the 2024 limits for 401k catch-up contributions is still $7,500. Considering that the 401k max contribution for 2024 is $23,500, 401k limits 2024 for employees aged 50 and above is $31,000.

Are you allowed to make early withdrawals from your 401k?

Yes. However, you would have to pay a 10% additional tax if the withdrawals are made before you reach the age of 59 and a half. Exceptions to this rule are specified by the IRS when the withdrawals:

• are made to a beneficiary on or after the death of the participant

• are made because the participant has a qualifying disability.

• are made for the participant’s medical care

What is the difference between 401k and IRA?

A 401k is a retirement plan that’s administered and defined by the employer. On the other hand, an IRA is an individual retirement account managed by the employee or his preferred investment firm.

Since the decision-making for an IRA fall under a third party’s responsibility, it involves specific regulations such as an income limit and income phase out range for single taxpayers, married couples filing jointly, etc.