Key Changes to 2024 401(k) and Self-Employed Retirement Plan Limits

by Jonathan Medows

The Internal Revenue Service recently announced significant changes to the amount individuals can contribute to their 401(k) plans in 2024. If you are self-employed as a freelancer and have self-employment income, you can contribute a percentage of your self-employment income to a SEP-IRA and those limits are changing in 2024, too. 

The highlights of retirement contribution changes for 2024 include:

  1. The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased to $23,000, up from $22,500 in 2023. The SEP-IRA contribution limit is always the same as the annual additions limit for a 401k plan. It is $66,000 in 2023, and it will increase to $69,000 in 2024.
  2. An important point for self-employed individuals is that under the newly implemented SECURE Act 2.0,as of January 1, 2023, SEP IRA employer profit-sharing contributions can now be designated as a Roth IRA. The benefit of a Roth IRA is that you can contribute after-tax dollars which means that  contributions and the earnings on those contributions can grow tax-free and be withdrawn tax-free after the age 59½ as long as the account has been open for at least five years. Essentially, you pay taxes on money going into your Roth IRA, and then all future withdrawals are tax-free.

Note that the IRS has yet to set rules on how an employee is to elect to have the SEP contribution treated as a Roth. The provision states that the employee must elect for the contributions made by the employer to be treated as made to a Roth IRA. It also appears that an employer would not be required to offer the Roth election. 

Be aware that an election to receive contributions in a Roth IRA will trigger current taxation, even though they are employer contributions. Any designated Roth contribution made by the employer on the employee’s behalf is required to be included in the employee’s taxable wages as reported on Form W-2. Just like pretax contributions, which are tax-deductible to the employer, SEP Roth IRA contributions will be tax-deductible. In addition, any non-elective designated Roth contributions made by the employer are required to be fully vested. 

The IRS will still need to issue guidance on whether a SEP Roth IRA contribution impacts the amount of a Roth IRA contribution available to the employee to be made individually. Stay tuned for updates!

  1. The limit on annual contributions to an IRA increased to $7,000 in 2024, up from $6,500 in 2023. The IRA catch up contribution limit for individuals aged 50 and over is not subject to an annual cost of living adjustment and remains $1,000.
  2. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased to $7,000, up from $6,500. Therefore, participants in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan who are 50 and older can contribute up to $30,000, starting in 2024. The catch-up contribution limit for employees aged 50 and over who participate in SIMPLE plans is increased to $3,500, up from $3,000.
  3. Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or the taxpayer’s spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor the spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase out ranges for 2024:

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions outlined below:

If during the year either the taxpayer or the taxpayer’s spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor the spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) The phase out ranges for 2024 are as follows:

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $77,000 and $87,000 [up from between $73,000 and $83,000].
  • For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $123,000 and $143,000 [up from between $116,000 and $136,000].
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to between $230,000 and $240,000 [up from between $218,000 and $228,000].
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
  • The income phase-out range for taxpayers making contributions to a Roth IRA is increased to between $146,000 and $161,000 for singles and heads of household [up from between $138,000 and $153,000]. For married couples filing jointly, the income phase-out range is increased to between $230,000 and $240,000 [up from between $218,000 and $228,000]. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
  • The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is:
    • $76,500 for married couples filing jointly [up from $73,000]
    • $57,375 for heads of household [up from $54,750]
    • $38,250 for singles and married individuals filing separately [up from $36,500]
  • The amount individuals can contribute to their SIMPLE retirement accounts is increased to $16,000 [up from $15,500].

Now is the time to look ahead toward retirement planning so you can take advantage of both tax savings for 2023 and look ahead to maximizing savings for 2024. This will not only provide certain tax advantages, but it will also ensure that one day you have a comfortable retirement! For more information, contact our tax team. We can help you plan for these changes and your end of year taxes, too.

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