Retirement Savings Contributions Projected to Increase

According to a forecast from pension consulting company Mercer, the amount individuals can contribute to their tax-deferred 401(k) plans is expected to rise by $500, or 2.2%, in 2024. The company predicts that the contribution limit will increase from $22,500 to $23,000 next year for 401(k), 403(b), and 457 plans, which are the equivalent retirement savings plans for nonprofits and the public sector.

However, Mercer also mentions that there will be no increase in the catch-up contributions allowed for individuals over 50. Consequently, for workers in their 50s and 60s, the total tax-deferred contribution cap will only rise from $30,000 to $30,500, representing a modest increase of 1.7%.

It is worth noting that these estimates come at a time when the official inflation rate is 3.2%. The Federal Reserve is actively trying to bring it down to a target rate of 2%. Despite this context, there is a planned increase in the catch-up contribution limit starting in 2025, but it will only apply to individuals aged 60 to 63. Their limit is expected to go up from $7,500 to $10,000.

Mercer's forecasts derive from the Internal Revenue Service's methodology, considering factors such as cost-of-living adjustments and rounding methods. Additionally, these projections take into account the relevant inflation figure, which is measured by the consumer-price index for urban consumers (VPI-U).

It is important to note that these are estimates and the actual figures will not be known until October. The IRS will calculate cost-of-living adjustments by comparing the CPI data for July, August, and September with the corresponding figures from the previous year. Similarly, Social Security follows a similar process.

Overall, while the projected increases in retirement savings contribution limits are relatively modest, they hold significance in a period marked by inflation concerns and ongoing efforts to manage economic stability.

To truly understand the significance of next year's anticipated contribution-limit increases, we turn to Vanguard, a trusted source in the financial industry. According to their extensive survey, the median 401(k) balance among their impressive 4.9 million customers stands at a modest $27,500. Surprisingly, this is only a little more than what workers under the age of 50 can contribute in a single year.

Digging deeper into the data, Vanguard reveals that the median age of plan participants surveyed is 43. With retirement still potentially decades away for these individuals, one can't help but ponder the absence of traditional pension plans, such as the defined-benefit plans enjoyed by only 15% of private-sector workers. Quite a contrast when compared to their government counterparts, where a staggering 86% benefit from such plans.

Fortunately, Social Security, an integral part of the retirement landscape, remains in exceptional financial health. This provides a degree of comfort for those lacking pension coverage.

In the realm of 401(k) contributions for high earners – referring to those with an annual income surpassing $150,000 – Mercer offers some enticing news. Recent announcements from the IRS indicate that these individuals can continue deducting their catch-up contributions from taxable income for the next two years. Undoubtedly a welcome development for this select group.

However, it's worth noting that the Secure Act 2.0 retirement act passed by Congress last year introduced a provision mandating high earners to make these additional contributions using after-tax dollars. Understandably, this led to various concerns and complaints, prompting the IRS to amend its implementation timeline. The rule will now take effect in 2026, two years later than originally planned.

In summary, the latest updates regarding 401(k) limits present a more favorable outlook for high earners compared to the rest of the workforce.

Further Explorations:

1. IRS provides high earners with more flexibility: Catch-up contributions into a Roth can be postponed until 2026. Is now the time to act?
2. Retirement dreams and home ownership: Should you consider tapping into your 401(k) savings? A closer examination.