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If you want to save more for retirement, 401(k) contribution limits are increasing for 2024. But experts say there are some things to consider before getting the most out of your plan.
In 2024, you can defer up to $23,000 into your 401(k) plan, up from $22,500 in 2023, plus an additional $7,500 for savers age 50 and older. Some high-income earners can put even more money into their 401(k), depending on the plan’s rules.
According to Vanguard’s 2023 report, about 15% of investors reached their employee deferral cap in 2022. However, the average deferral rate for employees who were automatically enrolled in the plan was 7.3%.
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Pre-tax 401(k) contributions provide up-front tax relief by reducing adjusted gross income, but investors are obligated to pay a levy on future withdrawals. By comparison, after-tax Roth 401(k) contributions allow you to grow your wealth tax-free without reducing your current year’s taxes.
“If you’re totally comfortable waiting until you’re past age 59 and a half to access that money, you can take advantage of these tax advantages,” says Douglas Bonepers, a certified financial planner and president of Born Fied Wealth in New York. This preferential treatment could go a long way.” He is also a member of his CNBC Financial Advisory Council.
If we’re totally comfortable waiting until after age 59 1/2 to access that money, these tax benefits can be very effective.
Douglas Bone Perth
President of Born Fied Wealth
But “it’s clear that affordability is a big part of it,” and other financial goals may take priority before maximizing retirement benefits for the year, he said. .
Don’t miss the 401(k) game
If cash flow is limited, experts suggest contributing at least up to your employer match. This is something that is deposited with the company based on your donation. “But then the goal priorities start moving,” Vonepers said.
If you’re saving for a home purchase or wedding expenses, “you may have more money allocated to a money market fund or savings account than a 401(k)” at one point, he says. .
Having emergency savings is also important, says Boston-based CFP Katherine Varega, founder of Green Bee Advisory, who recommends starting with at least three months’ worth of expenses.
Ultimately, you need to rank your short-term and long-term goals, including how much they will cost and when you want to achieve them, Bonepers added.
Consider “trial and error” when it comes to contributions.
“Our goal is for everyone to max out their 401(k),” Varega said. “But there are many clients who can’t do that.”
Determining the right percentage “may require some trial and error,” but try a higher contribution amount over a few paychecks to see how it affects your cash flow. You can, she said.
“If you feel like you have a little more room, you can increase it by one percent,” Vallega said.
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