Kristin Bartlow

Financial Advisor, Managing Director

Creating customized financial plans and managing investment portfolios for Bay Area families, entrepreneurs and retirees.

WEST COAST

January 23, 2024
Kristin Bartlow

New Year, New Limits: Optimizing Your Retirement Savings in 2024

The start of a new year often brings fresh perspectives and a renewed focus on personal goals, particularly when it comes to financial well-being. For retirement-minded individuals, 2024 offers an exciting opportunity to boost their nest egg thanks to welcome changes in IRS contribution limits and strategic planning techniques.

Why Increasing Your 401(k) Contributions Is Important

If we take a step back to 2022, you’ll likely recall extraordinarily high inflation wreaking havoc on just about every aspect of our lives — higher utility bills, groceries, gas … you name it. But one byproduct of that high inflation was an increase in worker wages in 2023, as employers needed to adjust salaries to better reflect the higher cost of living. 

According to the White House, real wages grew year-over-year by about 0.8% by the end of 2023.1 Keep in mind that this is for the entire population. In reality, I’ve seen clients gain on average 2% to 10% in salary increases over the past year or so. Of course, it varies by industry and position, but overall, there’s a good chance your salary has changed as a result of high inflation in 2022 and 2023.

The question is, have you adjusted contributions accordingly to your retirement savings accounts, like your 401(k)? When people experience a promotion and/or salary bump, they’re often tempted to spend the additional dollars (usually on material goods like nicer cars, homes, or luxury items) rather than increase their savings. While you should certainly enjoy the benefits of a higher salary by gradually increasing your lifestyle, it’s important to still prioritize your future goals — like retirement.

Let’s take a look at what the 2024 contribution limits are, and how you can keep your retirement income needs top of mind this year.

What Are the 2024 401(k) Contribution Limits?

Each year the IRS reassesses and adjusts contribution limits to retirement plans based on the past year’s cost of living increases. For 2024, the IRS has made the following changes:2   

  • 401(k) Expansion: The IRS increased the annual 401(k) contribution limit by 2.2%, bumping it to $23,000 in 2024, an increase of $500. This seemingly small jump translates to substantial potential when incorporated into your long-term saving strategy.
  • Catch-Up Catalyst: For those seasoned savings veterans aged 50 and above, the catch-up contribution limit also receives a welcomed boost, rising from $6,500 to $7,500 in 2024. This $1,000 increase provides invaluable flexibility to help close potential gaps accrued during earlier career stages and accelerate your retirement trajectory.

As a reminder, your 401(k) is funded with pre-tax dollars. Contributions reduce your taxable income for the year and the funds grow tax-deferred in the account. When it comes time to start drawing down the funds in your 401(k), however, you will be required to pay income tax on both the initial contributions (the principal amount) and any growth within the account.

Concerned About Taxes in Retirement?

If you’re worried about your potential tax obligations in retirement, ask your employer if they offer a Roth 401(k). While set up similarly (contributions are automatically deferred from your paycheck each month), Roth accounts are funded with after-tax dollars. This means tax-free withdrawals in retirement, but the trade-off is that you won’t receive a tax break for your contributions. Roth 401(k) contribution limits are the same as traditional 401(k) limits in 2024 ($23,000, or $30,500 for those 50 and older).

If a Roth 401(k) isn’t an option, you may be able to do a Roth conversion, which essentially converts the funds from your 401(k) into a Roth IRA. This option takes some preparation and planning, as it will require you to pay tax on the converted amount in the year the conversion is done.

A Reminder About Contribution Limits

Contribution limits may be a bit deceiving, as $23,000 (or $30,500) isn’t the whole story. You and your employer may contribute up to $69,000 total in contributions to your 401(k). Most employers offer employer matching to incentivize employees to take advantage of their benefits. This may be a dollar match, though it’s more commonly a percentage.

For example, your employer may match 50% of your contributions to your 401(k), up to a certain percentage of your salary. Not taking advantage of employer matching is leaving free money on the table, and it’s another great reason to increase your contributions this year.

Some employers might also offer the option for after-tax contributions.  These contributions will grow tax-deferred and upon withdrawal, the growth on these contributions will be taxable.  Say you have a 401(k) plan at work and in 2024 you contribute the capped amount of $23,000.  If your employer matches 50%, they contribute $11,500 on your behalf, bringing the total to $34,500.  If the plan also offers an after-tax option, you can contribute an additional $34,500! 

Should You Maximize Contributions to Your HSA?

Speaking of contributions, if you’re eligible to open and contribute to a health savings account (HSA), I recommend you do so! HSAs are available to individuals or families who are participating in a high-deductible health plan (HDHP), which is determined by the IRS.

The HSA contribution limits for 2024 are:3  

  • $4,150 for individual plan participants (a sizeable 7.8% increase from last year)
  • $8,300 for family plan participants (again, a 7.1% increase)
  • $1,000 catch-up contribution increase for those 55 and older

Some people may hesitate to prioritize contributions to their HSA, especially if they’re relatively healthy. But HSA’s are actually one of the best-kept retirement-savings secrets around, thanks to their triple tax advantages. 

HSA’s are funded with pre-tax dollars, meaning that like a 401(k) those contributions reduce your taxable income for the year they’re made. The money in an HSA grows tax-free, and withdrawals are tax-free as well as long as they’re spent on eligible healthcare-related expenses. 

You can roll over your HSA year after year (or take it with you when you leave your job) and grow your HSA into a retirement income vehicle.  ​The longer that you allow the money to stay in the account, the longer that it can work for you, growing tax-free!

Other Areas to Update in the New Year

While you already have 401(k)s and HSAs on the brain, take an extra moment to review your beneficiary designations. Beneficiary designations are incredibly important to keep up-to-date, as they will “override” anything written in your other estate planning documents (including a will). If you have someone listed as the beneficiary of your retirement savings accounts that you don’t want on there, they will have the right to the account, even if your will says otherwise or you’ve remarried. 

Or, worse, not naming a beneficiary could mean your assets may be designated to your estate and become subject to probate. If you don’t name a beneficiary for your 401(k), the law in the state you reside will determine who receives it. 

Common accounts or policies with beneficiary designations include:

  • 401(k) 
  • IRA
  • Life insurance
  • Annuities
  • HSA
  • Brokerage accounts
  • Company Stock Plans

It’s important to note that not all accounts or policies will automatically prompt you to add a beneficiary designation. If you or your spouse has a stock plan through your employer, for example, you may need to reach out and request to create a beneficiary designation. Otherwise, those accounts may be subject to probate after your passing. If you’re unsure about what accounts can have beneficiary designations, your advisor can help with this process. 

In addition, it never hurts to check that you’re withholding the right amount of money from your paychecks each month to cover your tax liability at the end of the year. If you do need to make changes, you can submit a W4 form to your employer and they will update your withholdings accordingly. If you’re not sure what your withholdings should be, speak to your accountant or use the IRS’s free tax withholding calculator tool.

Ready to Conquer 2024?

These changes and strategic tips offer a powerful foundation for optimizing your retirement savings in 2024. Remember, however, that consistent effort and expert guidance are crucial for long-term success. Leverage the updated IRS limits, implement the recommended strategies, and consider consulting with me for personalized financial planning assistance.

Embrace the opportunities of 2024 and empower your future self with a robust and secure retirement plan! Book a call to get the conversation started.

ABOUT THE AUTHOR

KRISTIN BARTLOW

Financial Advisor, Managing Director

Kristin is a long-time resident of the Bay Area and has helped hundreds of clients achieve the financial futures they dreamed of. As an experienced financial planner, Kristin speaks the complex language of equity compensation, charitable giving and tax liabilities. She’s devoted to her client base of families and individuals in their 30s, 40s and 50s, knowing that the decisions they make now will have a deep impact on the future they want.

 

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