Unveiling the 3 Rule Changes in 2024 Impacting Your 401(k)

As the year draws to a close, you may be prompted to reflect on your financial portfolio, reassess asset allocations, and reconsider investment strategies. Amidst this annual ritual, another crucial aspect demands your attention. The Internal Revenue Service (IRS) announces new adjusted contribution limits and other modifications to retirement accounts like the 401(k) at the end of each year. These rules can significantly influence your retirement planning. This is why this time of the year is a pivotal juncture to familiarize yourself with these changes. Understanding the latest regulations is imperative for maximizing your retirement contributions and optimizing the benefits of your 401(k) account.

Consider consulting with a professional financial advisor who can help you understand the new changes in 401(k) rules announced for 2024. This article will also discuss three major 401(k) changes in 2024 that can help you shape your financial plan in the coming year, along with insights to help you navigate these adjustments and plan effectively for a secure financial future.

Below are 3 major 401k rule changes enacted by the IRS in 2024:

1. New contribution limits for 2024

The IRS has announced the new contribution limits for a 401(k). As of 2023, the maximum amount you could contribute annually to your 401(k) was $22,500. This amount was deducted from your paycheck before taxes so you could save money on taxes while planning for your retirement. Now, for the year 2024, the IRS has bumped up this limit to $23,000. That means you can contribute an extra $500 towards your retirement savings. Keep in mind that this limit is for each individual. So, if you have more than one employer and contribute to multiple 401(k) plans, the total of all your contributions across these plans should not go over the $23,000 limit for 2024.

If you are 50 or older, you should also know about 401(k) catch-up changes for 2024. The IRS allows you to make additional catch-up contributions to your 401(k). This extra allowance allows older employees to boost their retirement savings as they get closer to retirement. In 2023, this catch-up limit was $7,500. For 2024, it is going to be the same at $7,500. This means that with a catch-up contribution, you can contribute up to $30,500 to your 401(k) annually in 2024.

Employer-sponsored plans like the 401(k) also offer matching contributions from employers. This means your employer chips in a percentage of what you contribute to your 401(k) annually. However, there is usually a limit to these employer matches. In 2023, the overall annual limit, combining employee and employer contributions, was $66,000 or 100% of employee compensation, whichever is less for people under 50 and $73,500 with catch-up contributions for those aged 50 and over. In 2024, this limit has been increased to $69,000 for those under 50 and $76,500 if you are aged 50 and over and make a catch-up contribution as well. This gives you even more room to grow your retirement nest egg.

When it comes to 401(k) contributions, there are specific limits and thresholds tied to employee compensation. The maximum employee compensation considered for calculating contributions stands at $345,000. This figure serves as a cap to ensure that contributions are based on a reasonable proportion of an employee’s income. Additionally, non-discrimination testing for key employees has a threshold for compensation of $220,000. Similarly, highly compensated employees are identified based on a compensation threshold of $155,000. These figures play a crucial role in maintaining fairness and equity in the administration of 401(k) plans and preventing any undue advantages for specific groups of employees.

2. Changes to 401(k)employer match due to the SECURE Act 2.0

The Setting Every Community Up for Retirement Enhancement Act (SECURE) Act 2.0 of 2022 has ushered in notable changes to 401(k) rules. These rules can impact various aspects of your retirement planning. One significant modification set to take effect next year revolves around Traditional and Roth 401(k) employer match rules. If you are currently paying student loans, the new provision allows you to receive a 401(k) matching contribution from your employer as you work to pay off your debt. This can be particularly beneficial for young workers.

Under this change, your student loan payments can serve as a substitute for direct contributions to your 401(k). Your employer can still calculate the matching amount based on your salary and the sum dedicated to your student loan repayment. Both private and federal student loans qualify for this provision, provided the loans were obtained solely for educational expenses. However, it is essential to note that this option is contingent on your employer’s plan offering it. To take advantage of this opportunity in 2024, you should ideally consider discussing the necessary plan amendments with your employer.

3. New SECURE Act 2.0 provisions for emergency withdrawals and savings

In recognition of the unforeseen financial challenges faced by individuals in the recent past, the SECURE Act 2.0 has introduced provisions to provide more flexibility and accessibility to retirement funds in emergencies. Under the new law, employees now have certain exceptions that facilitate penalty-free withdrawals for specific emergencies. For instance, you can withdraw up to $1,000 for immediate financial needs related to personal or family emergencies without incurring the typical 10% penalty. You also have an option to repay this withdrawal within three years. Access to 401(k) money without the 10% penalty has also been extended to victims of domestic abuse. In such circumstances, the Act offers a specific provision, allowing survivors to withdraw up to $10,000 or 50% of the account balance, whichever is less. While income tax is applicable on the withdrawal, those who repay the amount within three years can receive a refund of the income taxes paid.

The SECURE Act 2.0 also introduces an emergency savings feature for defined contribution plans like the 401(k). This new provision is set to take effect in 2024. The feature will enable participants to contribute to a dedicated emergency savings account within their 401(k) plan. Contributions to this account will be made after-tax, just like in a Roth retirement account, and capped at $2,500. If you opt for this option, you will be able to make up to one withdrawal per month. The first four withdrawals in a year will be penalty-free. Beyond that, your employer may impose some fees, but you can still retain access to your funds. The employer might also automatically enroll employees in the emergency savings account, directing up to 3% of their compensation.

Contributions to this new emergency savings account will qualify for matching contributions to the 401(k) account. This will provide an additional incentive for participants to build a financial safety net. In the event of leaving the company, the funds in the emergency savings account can be converted into a Roth investment account. The employee can also withdraw the funds if they wish. This flexibility can offer you better financial protection and help you address financial emergencies without jeopardizing your long-term retirement goals.

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Below are some strategies you can use to make the most of the new 401(k) changes in 2024:

1. Optimize your contribution limits

The new annual limit, elevated to $23,000, presents an excellent opportunity to optimize contributions and bolster your retirement nest egg. If you find yourself in the 50-and-older bracket, you can contribute an additional $7,500 to boost your annual contribution to $30,500 for the year. This increased allowance provides a strategic advantage for individuals in this age group and allows them to fortify their retirement savings further. It is essential to assess your financial capabilities and consider adjusting your contributions to maximize these new opportunities. This can help you align your retirement strategy with the enhanced limits and further increase your retirement savings.

2. Diversify your contributions across multiple employers

If you work for more than one employer, ensure that the total contributions across all your 401(k) plans do not exceed the individual limit of $23,000. You can strategically allocate your contributions to different plans based on employer matches and investment options. For instance, if one 401(k) account offers a higher employer match, you can contribute more to it as long as you do not go over the total limit.

3. Stay informed on employer matching changes

It is important to keep up-to-date concerning changes to employer matching contributions. With the SECURE Act 2.0, there have been some changes to how you can use employer matches. If you have a student loan, you can use your 401(k) contributions to save money and pay your loan sooner. Make sure to stay informed about your employer’s plan offerings and explore the possibility of receiving 401(k) matching contributions for student loan payments.

4. Consider emergency savings account options

You can evaluate the new emergency savings feature to stay prepared in the case of emergencies. As of 2024, you can contribute to a separate emergency savings account within the 401(k). This can be a better way to stay afloat than taking on a loan or accumulating credit card debt that can be hard to repay. You can assess the after-tax contributions capped at $2,500 and the associated withdrawal options. While this may not take care of all financial emergencies, it can help you get back on your feet. So, you may consider participating in this feature to build a financial safety net. Given the new exceptions for penalty-free withdrawals for emergencies, you may carefully evaluate your financial situation. If faced with unforeseen circumstances, you can leverage the opportunity to access funds without incurring the 10% penalty, especially if you fall under the specified categories, such as domestic abuse. Not only does this prepare you for emergencies, but it also helps you save money spent on taxes.

5. Engage with a financial advisor 

The complexity of these new changes in 401(k) rules can be difficult to understand. You may consult with a financial advisor who can help you grasp the intricacies of these modifications, assess your individual financial goals, and tailor strategies to maximize your 401(k) benefits.

Frequently Asked Questions (FAQs)

1. Are there any changes to Required Minimum Distributions (RMDs) from 401(k)s in 2024?

RMDs are mandatory withdrawals that you need to take from your tax-advantaged retirement accounts, such as Traditional IRAs and 401(k) plans, once you reach a certain age. Previously, you were required to initiate RMDs from your retirement plans at the age of 72 years. However, the SECURE 2.0 Act has pushed the starting age for RMDs to 73. This new rule was effective from January 1, 2023. If you turned 72 in 2022, your first RMD was due by April 1, 2023. While there is no change to the RMD age in 2024, looking ahead, the RMD age is set to increase to 75 within the next ten years. So, you may want to account for these retirement changes in your financial planning in the future.

2. Have the 401(k) rules changed for catch-up contributions?

There are no changes to the catch-up contributions in 2024. The limit remains the same as in 2023 and is capped at $7,500 for 401(k) retirement accounts.

3. What is the difference between 401(k) contributions from 2023 to 2024?

Below is a table of the difference between the contribution limits of the two years:

To conclude

These three pivotal rule changes in 2024 present an opportunity for you to reassess your contribution strategy. You can enhance your contributions and save more for your retirement. The 401(k) account can also help you pay your student loan in 2024. Moreover, the emergency savings features can be helpful in adverse situations. However, it may be advised to consult a financial advisor to make sense of these changes. With professional assistance and strategic planning, you can navigate 2024 and build up your 401(k) savings substantially.

You can use the free advisor match service to get in touch with a financial advisor who can advise you on how to incorporate the new 401k rules in your financial plan. Just answer a few simple questions about your financial goals, and the tool will match you with 1 to 3 advisors who are best suited to help you.