Future retirees, saving money for their golden years with 401(k) retirement plans are now able to save more money, due to a recent announcement by the Internal Revenue Service (IRS). The 401(k) are popular and tax-advantaged way for individuals to save for their retirement. These plans are named after a section of the U.S. Internal Revenue Code, which outlines the regulations governing them.
In a 401(k) retirement plan, employees can allocate a portion of their pre-tax earnings to an investment account. These contributions are then invested in a selection of options, typically including stocks, bonds, and mutual funds. The income generated from these investments is tax-deferred until the funds are withdrawn during retirement.
IRS Lifts Retirement Savings Ceiling: Know How It Will Impact You for Good
In recent great news for retirement savers, the IRS has recently announced an increase in the 401(k) contribution limit. Starting next year, individuals will be able to contribute up to $23,000 to their 401(k) accounts, marking a $500 increase from the current limit. This adjustment provides an opportunity for savers to put away even more money for their retirement nest egg.
Also, individuals aged 50 and older can take advantage of what are known as “catch-up contributions.” These additional contributions allow them to save an extra $7,500 in their 401(k) accounts, bringing their total contribution limit to $30,500. This incentive is designed to help those who may have fallen behind in their retirement savings to catch up and build a more substantial cushion for their golden years.
Improving Your 401(k) Retirement Plan
It’s worth noting that the increased contribution limits don’t apply solely to 401(k) plans. They also extend to other retirement savings vehicles, such as 403(b) plans, most 457 plans, and the federal government’s thrift savings plan. This ensures that a wider range of individuals, including government employees and those in the nonprofit sector, can benefit from these expanded savings opportunities.
In addition to the 401(k) and similar retirement plans, the IRS has raised the annual contribution limit for Individual Retirement Accounts (IRAs) as well. Starting next year, individuals can contribute up to $7,000 to their IRAs, an increase of $500 from the current limit. For those aged 50 and older, there’s an extra advantage, as they can make additional catch-up contributions of up to $1,000, resulting in a total annual limit of $7,500.
What Is A 401(k) Retirement Plan: A Beginners Guide
A Traditional 401(k) is a retirement savings plan where contributions are deducted from your paycheck before income taxes are calculated. This reduces your immediate taxable income. These contributions are then invested in mutual funds and other assets, growing over time. When you withdraw money from your Traditional 401(k) during retirement, you’ll pay ordinary income tax on the withdrawals.
On the other hand, a Roth 401(k) involves making contributions after you’ve already paid income taxes. While there’s no upfront tax benefit, qualified distributions, like those taken after age 59 ½ and at least five years after your first contribution, are tax-free, similar to a Roth IRA.
Choosing between a Traditional and a Roth 401(k) depends on your future tax outlook. If you anticipate being in a higher tax bracket during retirement, a Roth 401(k) may be a wise choice. For young professionals with lower income levels and tax brackets, a Roth 401(k) can be a favorable option.
If your employer offers both types of 401(k) plans, you can contribute to both. It’s advisable to consult with a tax professional or financial advisor to make an informed decision about your retirement savings strategy.