This column was written by Liz Coleman and originally appeared in the Memphis Business Journal.
Retirement planning is a crucial aspect of financial management, and understanding the annual adjustments to retirement plan contribution limits is pivotal for making informed decisions. Every year, these limits are adjusted by the government, reflecting modifications for inflation and impacting various retirement savings avenues. Contributing the maximum allowed amount to retirement plans offers the dual benefit of securing future financial stability and potentially reducing current taxable income.
Traditional and Roth IRAs
The maximum contribution limit for both traditional and Roth IRAs has seen an uptick for 2024, allowing individuals under 50 years old to contribute up to $7,000, an upward adjustment of $500 from 2023. Those age 50 and above can add an additional “catch-up contribution” of $1,000, for a total of $8,000. Note that these annual limits are the maximum amount that can be contributed to all of an individual’s traditional and Roth IRAs combined, not on a per-IRA basis.
“Earned income” is a prerequisite for IRA contributions, primarily sourced from employment or from having self-employment income. There are specific criteria delineated by the IRS that outline what constitutes earned income, a crucial factor when considering contributions to these retirement plans.
While traditional IRA contributions may provide a tax deduction, eligibility for that tax deduction may be affected depending on total income and whether the individual or the spouse is covered by a workplace retirement plan. The phase-out ranges for 2024 have been revised and provide limits for the deductibility of contributions based on income, filing status, and coverage by an employer retirement plan. For instance, the phase-out range for single taxpayers covered by a workplace retirement plan now falls between $77,000 and $87,000, a notable increase from the $73,000 to $83,000 range for 2023. Married couples filing jointly, where the spouse contributing to the IRA is covered by a workplace retirement plan, encounter a revised phase-out range of $123,000 to $143,000, up from $116,000 to $136,000 for 2023. Making a nondeductible contribution to a traditional IRA is always allowed, regardless of income. Also, other limits apply, so be sure to check with your tax advisor to understand which ones apply to your situation.
The income phase-out range for making a contribution (always nondeductible) to a Roth IRA has also undergone adjustments for 2024. Singles and heads of household now face a phase-out range based on income of $146,000 to $161,000, up from the previous $138,000 to $153,000 in 2023. Likewise, married couples filing jointly have a phase-out range for income levels of $230,000 to $240,000, an increase from the 2023 phase-out range of $218,000 to $228,000. For individuals whose income is above the phase-out range based on their filing status, a direct contribution to a Roth IRA is not allowed.
Simplified Employee Pension (SEP) IRAs
Like other retirement plans, Simplified Employee Pension (SEP) IRA contributions have been adjusted for the 2024 year. The SEP annual compensation limit now stands at $345,000, an increase from the previous year’s $330,000. Moreover, the maximum SEP contribution has been increased to $69,000, marking a rise from $66,000 in 2023. These 2024 adjustments offer a higher retirement contribution option for self-employed individuals or small business owners utilizing SEP IRAs for retirement savings.
Employer-sponsored retirement plans
Other employer-sponsored retirement options such as 401(k), 457, and 403(b) plans also have updated contribution limits for 2024. The maximum annual elective deferral limit for these plans has reached $23,000, up from $22,500 in 2023. Additionally, individuals aged 50 and above can make catch-up contributions, now set at $7,500 for 2024. These adjustments aim to facilitate more substantial retirement savings opportunities, especially for those closer to retirement age.
The Saver’s Credit
The Saver’s Credit, also known as the Retirement Savings Contributions Savers Credit, is designed to incentivize low- and moderate-income workers to save for retirement. The maximum Saver’s Credit is $1,000 ($2,000 for married couples), and the income limit for eligibility for this credit has been raised in 2024. Married couples filing jointly can utilize the credit with an income limit of $76,500, up from $73,000 in 2023. For heads of households, the limit is $57,375, an increase from $54,750, while singles and married individuals filing separately now have an income limit of $38,250, up from $36,500 the previous year.
The adjustments made to retirement plan contribution limits in 2024 offer enhanced opportunities for individuals to fortify their retirement savings while providing potential tax deductions, depending on each individual’s situation. Knowing the annual limits and having a goal of maximizing allowed contributions can significantly impact one’s ability to secure a comfortable retirement and optimize tax efficiency. By consulting with a trusted tax advisor and leveraging these limits wisely, individuals can navigate more quickly toward a secure and prosperous retirement.
