It is never too soon to start planning for your retirement. There is no reason your retirement years cannot be the best of your life with proper planning! Tax law changes effective for 2024 allow you to further maximize on your retirement.
Because retirement planning is so robust, we will provide a multi-series to cover the material.
Contribution Limits:
There is an upper annual contribution limit to your 401K in 2024 of $69,000. For individuals 50 or older you can add an extra $7,500 as a catch-up contribution bringing the total annual contribution limit for individuals in this age group to $76,500.
Of the $69,000 or $76,500, employees can contribute $23,000 or $30,500 for 2024 pre-tax payroll contributions respectively.
Employer matching contributions does not affect your pre-tax payroll contribution limits. For 2024 it would be $23,000 or $30,500 depending on your age. However, employer contributions in combination with employee contributions are what allow you to get to the upper annual contribution limits of $69,000 or $76,500 dependent on your age.
The deadline to contribute to a 401K plan is December 31st of the current year.
Income Limits:
There are no income limits for contributing to a 401(k).
Required Minimum Distributions:
You are required to make minimum distributions (RMDs) when you reach age 72, or 73 if you reach 72 after December 31, 2022. You can delay taking RMDs until the year you retire, however, unless you are a 5% owner or greater of the business that sponsors the plan. RMDs are calculated by dividing your account's prior year-end fair market value (FMV) by a life expectancy factor. RMDs must be taken by December 31st each year to avoid a penalty tax of up to 5% of the amount that was failed to be withdrawn.
How is it Taxed?
Pre-tax dollars contributed to a 401K plan for tax purposes is not included in calculating your federal tax annually. This means that when pre-tax funds are contributed, the money is tax-deferred until you distribute the funds. If there is any employer matching, those funds are also not taxable to you until the funds are distributed. Once you start withdrawing (distributing) from your 401k plan, it is usually taxed as ordinary taxable income at your applicable federal tax rate, unless it is rolled into another qualified plan or an IRA.
If you make distributions from a 401k prior to age 59 1/2 there is an additional 10% tax on the amount withdrawn unless you can meet one of qualifying criteria. The more common of these criteria are to get you through hardships such as total and permanent disability or terminal illness. Separation from service at age 55 or older (age 50 for most public safety employees) is also a common qualification for penalty free 401K withdrawal. If you have questions on your specific situation to see if you would qualify please contact our office for further guidance.