Navigating contribution limits for saving can easily have you missing out on opportunities to save on your taxes. Whether you are a Baby Boomer, Gen-Xer, or Millennial, understanding the rules for retirement plans like IRAs and 401(k)s can help you make the most of your savings. This article will break down key aspects of employer-sponsored and individual retirement accounts for 2024 and offer actionable tips to optimize your contributions.
Employer-sponsored 401(k) vs. Solo(k) — the following shows how much you can save:
· 401(k), 403(b), and 457 plans: $23,000 (or $30,500 with the catch-up contribution for those 50 and older).
· Roth 401(k), Roth 403(b), and Roth 457 plans: $23,000 (or $30,500 with the catch-up contribution for those 50 and older). If you have an employer sponsored plan, you can mix your traditional (pre-tax savings) with your Roth savings.
· Note that any employer matching contributions are pre-tax in 2024.
Employer sponsored 401(k) vs solo(k) are a bit different in the way they operate. With the typical employer sponsored plan you save through your paycheck through your payroll provider, such as ADP or TriNet. If you want to increase your savings, you must do it through payroll and must wait for it to start on a future paycheck.
Your most recent payroll summary should show you how much you saved for the year. If you have not reached the limit, you can make payroll changes to increase your savings. For it to count for 2024, you must contribute by the end of the year.
If you have a solo 401(k) you can work through your investment advisor or custodian, such as Charles Schwab to make the contribution.
IRA And Roth IRA
You can save $7,000 (or $8,000 if you are 50 or older) in an IRA or Roth IRA in 2024 and also in 2025.
Traditional IRA deductibility (if covered by work plan).
Single MAGI phaseout $77,000 – $87,000
MFJ phaseout $123,000 – $143,000
MFJ (if only spouse is covered) $230,000 – $240,000
Roth IRA eligibility
Single MAGI phaseout $146,000-161,000
MFJ phaseout $230,000 – $240,000
You must contribute by your tax filing date or April 15 whichever comes first. Pre-tax contributions in a 401(k) will reduce your modified adjusted gross income, potentially make you eligible for a contribution. To qualify, it may be important that you make contributions to your 401(k) or solo 401(k) by the end of the year.
Common Pitfalls And How To Avoid Them
1. Be careful if you have multiple 401(K) plans, such as an employer sponsored 401(k) and solo(k) plan. The employee contribution limit of $23,000 (or $30,500 with the catch-up contribution for those 50 and older) are applied across all plans you participate in. If you still want to save more, and If your income is less than the IRA or Roth IRA phaseout, you could contribute to them.
2. Not Monitoring MAGI Limits: For higher earners, Modified Adjusted Gross Income (MAGI) can limit contributions to Roth accounts or deductibility of Traditional IRA contributions. For instance, Roth IRA contributions phase out at $146,000–$161,000 for single filers and $230,000–$240,000 for married filing jointly.
3. Forgetting about Spousal IRAs: Even if one spouse doesn’t work, they may still contribute to an IRA, provided the other spouse has earned income.
Concluding Thoughts
Pre-tax contributions in 401(k) and IRA, offer current year tax savings with future tax liabilities and possible Medicare surcharges. By thinking ahead, you may be able to leverage any workplace plans along with IRA and Roth contributions. If you’re over age 50, you could save $30,000 in your combined employer sponsored and solo 40(k), along with an additional $8000 in IRA contributions.