Look left and then right.
Any working-age adults sitting or standing nearby? Would you guess by looking at them that they are saving for the future?
Here are some stats for us numeric geeks: Nationwide, there are about 625,000 individual 401(k) plans with some 60 million active participants. And my personal favorite geek-stat for this particular topic is that the total amount of money invested in American 401(k) accounts exceeds $6.3 trillion.1 (Which is more than the entire GDP of France and Italy… combined.)2
If there is a working-age adult standing near you right now, I would bet the farm that they invest in a 401(k).
As an aside, we once interviewed Ted Benna, the benefits consultant (who actually does live on a farm), and the person who is widely credited with having discovered the tax loophole (yes, loophole) through which 401(k) plans were invented.
With the arrival of a new year, it is time to update your knowledge about defined contribution plans.
Here are four things you need to know for 2024.
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The contribution limits for 2024 have increased.
If you have a 401(k), 403(b), a federal government Thrift Savings Plan, or even possibly a 457 plan, the maximum contribution limit has risen from $22,500 to $23,000 for 2024. To break that down, that’s about $880 a paycheck (assuming 26 pay periods).
If you are 50 years of age, or older, the catch-up contribution limit for 2024 remains unchanged at $7,500, which means you can sock away $30,500 this year (and that of course does not take into account any matching funds your employer contributes).
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There are no income limits to participate in your employer-sponsored 401(k).
A common misperception about 401(k) participation is that there are income limitations. The fact is that there is no such thing as “making too much money” to contribute. There also isn’t an income limit to contribute to a Roth 401(k) (unlike a Roth IRA).
There are stipulations if you are what is referred to as a “highly compensated employee,” wherein if you make more than $150,000, receive a salary that is in the top 20% of the firm, or own more than 5% of the company, the amount you are allowed to contribute could get capped. (Check with your HR department or plan administrator.)
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If you quit your job, or get laid off, you cannot keep contributing. But don’t automatically cash out.
Even though if/when you leave your job you will no longer be able to contribute to your previous employer’s plan, you do have some viable options.
First, except in some unique circumstances, you may be able to leave your money right where it is. Second, you could “roll” your savings into an IRA, or even into your new employer’s plan.
However, the one thing you almost certainly do not want to do is to allow your former employer to cut you a check. If you allow that to happen, it will count as a withdrawal and, not only will you owe taxes on that amount, but if you are younger than 59½, you will also get walloped with a 10% early withdrawal penalty.
If you get laid off, quit, or switch jobs or retire, immediately speak with a fiduciary advisor. (Money in transition is among the key life events when you will need expert advice.)
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Don’t forget about Required Minimum Distributions (AKA, mandatory withdrawals) in retirement.
If you have been saving in a 401(k), that money was probably deposited via a payroll deduction before taxes were withdrawn.
One way or the other, however, because you cannot keep funds in a tax-deferred retirement account stashed away indefinitely, you can be certain that the government it going to collect its piece of the pie.
While a forward-thinking, tax-smart approach to retirement should include working with an advisor who will evaluate what monies you should spend (and in which order), some people just assume that leaving that great big 401(k) balance untouched for as long as possible is the best approach.
On the contrary, it can often be the worst.
Not having a personalized retirement account distribution strategy in place is among the most common, and costly, mistakes I see consumers make. That is because, for millions of taxpayers, waiting too long to tap into certain tax-deferred accounts makes the RMD amounts so large that it ends up needlessly costing them thousands – even tens of thousands – of dollars in taxes. (Simply, in certain circumstances, it may be financially prudent to draw down your tax-deferred accounts years before the government says you have to.)
Speak to a credentialed advisor, but with the adoption of the SECURE ACT 2.0, the age at which RMDs begin is currently 73, with a jump to age 75 in the year 2033.
Taken from another perspective, if you were born between 1951 and 1959, your RMD age is 73. And if you were born in 1960, or later, it is 75.
Wishing you and yours a happy 2024!
1 Retirement 2023: Here’s How Much the Average American Has in Their 401(k) (yahoo.com)
2 What is the GDP of France - Google Search
3 What Is A Pension? – Forbes Advisor
