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With the 2025 tax season just a few months away, taxpayers should know the contribution limit so they know if they contributed more than the limit or to avoid estimating their tax liability for the 2024 tax year. Taxpayers who contribute to their retirement through 401k plans can check full details here.
401k Contribution limits
The IRS publishes IRA retirement plan contribution limits each year before the tax year, the 2024 tax year contribution limit was announced last year. The contribution limit applies from January 1 to December 31 of a given year. The annual cap on pension plans was enacted to ensure that high earners do not use pension plan contributions to reduce their tax bills and save for their retirement.
The contribution limit for the year 2024 has been increased from the previous year 2023 by $500. That makes the 401k contribution limit for 2024 $23,000 from the $22,500 limit for 2023. So the combined limit for employees and employers will be $69,000 for 2024. The IRS decides the contribution limit based on any cost-of-living adjustments that may affect the pension plan and other items in 2024.
The contribution limit for 2024 includes both Roth 401k and traditional 401k plans and elective employee salary deferrals. However, if you are over 50, your contribution increases by $7,500 for 2024, resulting in a total of $30,500 higher than in 2023. These are called catch-up contributions and remain unchanged for the 2024 tax year ($3,500) in packages SIMPLE 401 k.
Conditions for deducting 401k contributions from taxes in 2024
Taxpayers can deduct contributions made to 401k retirement plans if they meet certain conditions. During the tax year, if you or your spouse are covered by a workplace pension plan, your tax deduction may be phased out or reduced based on your filing status and income, however, if you are both not covered by any workplace pension plan, your deduction will not be phased out.
So if you have a 401k account, you can check the ranges for the 2024 tax deductions to be phased out if their income reaches a certain limit for 2024:
- Married couples filing jointly and one of them made a contribution to an IRA covered by a workplace retirement plan, then your phase-out range for the deduction is between $123,000 and $143,000, up from the previous year’s limit of $116,000 to $136,000.
- Single or unmarried individuals whose pension plan is covered by a workplace plan will see their deduction phase out if their income is between $77,000 and $87,000, up from the previous year’s range of $73,000 to $83,000.
- Married individuals who file their tax returns separately and are covered by the workplace plan will not have their deduction phased out because it depends on cost-of-living adjustments, leaving it between $0 and $10,000.
- Now, an IRS contributor who is not covered by a workplace plan and has a spouse who has such plans will have a different phase-out range for tax year 2024, between $230,000 and $240,000 which is up from the previous range of $218,000 to $228,000 .
For contributors to a ROTH IRA, the deduction limit increases to between $146,000 and $161,000 for singles and heads of household, while for married couples filing jointly the amount is $230,000 and $240,000, and for married couples filing separately it remains the same between $0 and $10,000.
What are the after-tax contribution rules for a 401k?
An after-tax 401k contribution means when you’ve contributed an amount you’ve already paid taxes on, which happens when your taxable income for the current year is the same. An after-tax contribution allows the account holder to save more for their retirement, which grows in the account tax-free, however, the earnings will be taxed when you withdraw.
Taxpayers should understand that an after-tax contribution does not reduce their tax bills. However, it is efficient to save more for retirement, so you should familiarize yourself with its rules:
- You can make after-tax contributions when you meet your contribution limit, but the combined employee/employer maximum limit is still not met.
- You can make after-tax contributions when you reach your Roth limits or before-tax limits.
- After-tax contributions can be converted to tax-free income in the future if they become part of a mega backdoor Roth conversion. The mega backdoor allows high earners who cannot contribute directly to a Roth IRA to contribute to their retirement.
SURE.20 change for 401k
The Tax Administration has announced the following changes under the SECURE 2.0 Law, which enable automatic enrollment in pension plans:
- The agency is making changes to annuity contracts, where $200,000 is the most you can contribute to a 2024 annuity contract.
- The agency increased the charitable distribution deduction limit to $105,000 for the 2024 tax year from the previous year’s $100,000 limit.
- The agency raised the deduction limit for one-time IRS distribution elections in split-interest entities to $53,000 for the 2024 tax year from $50,000 the previous year.
Above are the changes made by the agency for tax year code 2024 to the 401k contribution limit for the tax credit limit.
What if you contributed more than the 401k limit?
If by any chance you have contributed more than the contribution limit, you must correct this on your employee’s end by notifying your administrator. The administrator will distribute the excess deferral if your plan allows the distribution of excess deferral.
You must catch your excess contributions before the tax return deadline to make the changes because the administrator will file a 1099-R confirming the distribution of the excess contributions. If you don’t, you may have to pay more tax on the excess contribution.
Taxpayers with 401k retirement plans should check their taxable income, contribution limit, and deduction limit to make sure they are meeting their tax obligations without making any mistakes and paying tax on excess contributions.
