A 401(k) plan offered by your employer is one of the easiest ways to save for retirement. Typically, these retirement plans will let you invest a tax-free portion of each paycheck, depending on the contributions made. While you can contribute a portion of your pay automatically to your 401(k), the IRS limits the amount you can contribute annually.

What Is a 401(k)?

A 401(k) plan is an employer-sponsored retirement plan that allows employees to invest a portion of their paycheck before taxes.

Money contributed to a traditional 401(k) plan goes untaxed until you withdraw the money upon retirement.

Initially, the 401(k) was a retirement investment plan to supplement employer pension plans. Nowadays, only a few organizations offer pension plans.

With 401(k) plans, the employers may match part of the contributions up to a percentage of their employees' salaries. However, it is optional for every employer to do so.

Employee contributions to 401(k) plans are invested in an assortment of stocks, bonds, and mutual funds as provided by employers.

Even though the IRS has imposed strict limits on an employee's yearly contributions, the 401(k) plan remains the primary source of retirement income and investments for many workers today.

2024 Contribution Limit Changes

For 2024, the IRS has set the maximum employee contribution limit for a 401(k) account at $23,000.

That is a $500 increase over the 2023 limit on maximum contributions ($22,500).

For employees aged 50 and over, the catch-up contribution remains unchanged from 2023 at $7,500.

However, that means in 2024, if you are 50 or older, you can contribute up to $30,500 instead of being limited to the maximum contribution of $23,000.

If you have multiple 401(k) plans, your total contribution to them, whether traditional or Roth, must not exceed $23,000. Any contribution to other retirement accounts like IRAs will not affect this contribution limit.

Certain employers allow after-tax contributions in addition to the employee's pre-tax contributions to 401(k) plans.

In 2024, the total combined limit of before-tax and after-tax contributions by employees and the employer's match cannot exceed $69,000 or 100% of the employee contribution, whichever is less. ($76,500 if they are 50 or older).

That's an increase of $3,000 from 2023, when the maximum limit was $66,000 ($73,500 if they are 50 or older).

Where the employer matches the 401(k) contribution, the employer's contribution does not count while determining the employee's limit as long as the combined $69,000 is satisfied.

The employer's matched contribution is essentially 'free' money into your retirement account. Therefore, this benefit will help you more the longer you stay with your employer.

Types of 401(k) Plans

A 401(k) plan is an employer-sponsored retirement plan with multiple options. Below are some types of 401(k)s:

• Traditional 401(k)
• Roth 401(k)
• Simple 401(k)
• Solo 401(k)
• Safe harbor 401(k)

Different rules apply to each of the plans. For instance, employers offering Simple 401(k) plans may be unable to provide other 401(k) plans.

Understanding your organization's 401(k) plans and contribution limits will help you better prepare for retirement.

Other than investing in the different types of 401(k) plans, you can consider retirement investments like IRAs.

IRAs are individual retirement accounts where you can invest pre or post-tax dollars depending on the kind of IRA you purchase.

The key to investing in retirement plans is to be aware of the rules and limit exposure to fines and penalties.

Individuals can review the November 1, 2023 announcement issued by the IRS for additional information.