When the IRS announces the new amounts you can contribute to retirement plans each year, the number everyone focuses on is the maximum you can put into workplace 401(k) plans, which is $23,000 for 2024. But what if you want to save more than that and still get preferential tax treatment? You have some options.
The easiest way if you’re 50 or older is to max out that $23,000 contribution and then add a catch-up contribution, which allows you to contribute another $7,500, for a total of $30,500. That catch-up amount stayed static for 2024, so the total for amounts to $500 more than this year.
Most people, though, do not max out their base contribution or make any catch-up contributions. In 2022, 15% of all workers with 401(k) plans put in $20,500 — the maximum for that year — and 16% of the group eligible for catch-up contributions made any, according to the latest “How America Saves” report from Vanguard.
Another way to slightly increase the value of your 401(k) contributions down the road is to switch from a traditional pretax 401(k) contribution to a Roth 401(k) contribution. You’ll pay the tax upfront on what goes into your account, but you won’t pay tax on the growth when you take the money out in retirement.
Whether this strategy works for you depends on your financial situation now and how you expect it to change in the future. A high earner who is already in the 37% tax bracket and who has a lot of money saved might want to stick with pretax contributions. Meanwhile, a younger worker in a low tax bracket might benefit down the road from stashing away tax-free money now.
“In a high tax bracket, it doesn’t make sense,” says Chris Chen, a certified financial planner based in Boston. “But the Roth can be important for retirees.”
In-plan Roth conversions
Another amount that is going up next year is the limit for defined contributions, which is basically the outer boundary set by the IRS on how much can go into a workplace retirement plan in total. That means the employee’s own contribution plus the employer’s contribution, whatever that may be. That total will be $69,000 for 2024, up from $66,000 this year.
Say you make $150,000 and you’re over 50. You can put in you $30,500, and if your employer matches at 6%, that’s another $9,000, which means you’ve only hit $39,500 out of the $69,000 allowed. This is where advanced strategies come into play, like in-plan Roth conversions. With some plans, you can make extra post-tax contributions up to that $69,000 limit and then convert them to Roth contributions immediately, but a lot of forces have to align for you to be able to do that.
First, consider your other savings options. Sri Reddy, senior vice president of retirement and income solutions at Principal Financial Group, steers people first to make contributions into a health-savings account if they are eligible, and then to make sure they are making use of every other type of tax-advantaged account that they can.
Then he asks if their workplace plan allows them to make after-tax contributions, if the plan has an in-plan conversion to Roth 401(k) option and if it allows automatic conversions. You need all three of those elements in place to make this strategy work smoothly, or else you end up with tax issues on growth if the money is left in the 401(k) account for any amount of time.
“There’s a continuum here,” says Reddy. “First you contribute to your 401(k) and get the match. And if that’s all you can save, great. If you can save more, max out the HSA, then look and see if you have other pretax money elsewhere. And then, otherwise, max out the after-tax contributions.”
Self-employed people have the most options
Employer matches are great, but what if you’re self-employed? You have options to put away even more money. If you open up a solo 401(k), you get to fill up both sides of the limits, for employee and employer, up to that $69,000. But even more contributions are allowed if you open up what’s known as a self-employed cash-balance defined-benefit plan.
These plans function like pensions, but you set them up for yourself using a third-party administrator. For 2024, the outer limits of an annual benefit for one of these types of plans will increase to $275,000 from $265,000.
This favors older high earners — such as doctors in solo practice, lawyers and other professionals — who are able squirrel away much more than the 401(k) limits in order to fund an annual benefit that high. It’s probably no surprise these plans are favored by financial planners for their own retirements.