Compare and evaluate different retirement providers to make informed choices. Ready to start? Rollover now.
Start My Rollover
Excellent
By Jenn Pavlick
Updated on November 15, 2023
Learn about our Editorial Process
Retirement planning is crucial to establish financial security later in life. Whether you’re just starting your career or years in, it’s never too late to start saving.
A 401(k) plan is a standard workplace retirement plan that allows savers to contribute tax-deferred earned income in addition to potential employer contributions (if there is a matching program). An IRA, or Individual Retirement Account, is a retirement savings plan taxpayers can open without an employer sponsor. Both options offer the opportunity to build a solid financial base.
However, the IRS limits the amount of money you can put toward your retirement accounts each year. This article will dive into 401(k) and IRA contribution limits to explore what they are, how they work, and how you can maximize your savings.
When we talk about annual contribution limits, we’re talking about the maximum amount of your gross income you can contribute to your retirement account each year. The IRS determines these limits yearly based on the prior year’s limit plus any cost of living adjustment.
These limits balance the need to save for retirement while ensuring that high-income earners aren’t unduly benefitting from the income tax benefits these plans provide. Some plans will have income ranges that indicate the tax benefits you’ll receive. Benefits may vary according to tax filing status, type of account, and other variables.
In 2023, the IRS (Internal Revenue Service) outlined that the maximum contribution an individual could make to their 401(k) employer-sponsored retirement plan was $22,500. But, in 2024, the IRS raised this amount.
Here is a snapshot of the contribution limits for the 2024 tax year:
If you have a 401(k) and an IRA account, and you earn beyond the IRS-designated limits, partial deduction limits ensure you don’t reduce your income tax too much for your income level. There are different phase-out ranges depending on whether you’re filing as a married couple, single filer, or head of household.
The IRA story is a bit different. In 2023, the maximum contributions for traditional and Roth IRAs were $6,500 if you were younger than 50 and $7,500 if you were 50 or older.
For 2024, these limits increased. For this tax year, the maximum contributions are:
Remember that neither a traditional IRA nor a Roth IRA is an employer-sponsored account, so there will be no employer match to either account.
What are the differences between traditional and Roth accounts? Both are tax-advantaged but in different ways. A traditional IRA is funded with pre-tax dollars, allowing you to write off contributions during the tax year they’re made (presuming you fall within the IRS guidelines for taking traditional IRA deductions).
On the other hand, Roth IRA contributions are made with after-tax dollars, preventing you from taking a deduction on your income tax return today but allowing you to take tax-free withdrawals in retirement.
As we mentioned above, if you have an employer-sponsored plan like a 401(k) and an Individual Retirement Account, you may be unable to write off the total contribution to a traditional IRA, depending on your taxable income and filing status. But for single filers with no workplace plan, you can deduct your total traditional IRA contribution on your tax return.
Roth IRAs are tax-advantaged (albeit in a different way) and intended to help those in a relatively low tax bracket by allowing them to pay taxes now rather than later. They impose income limits that can affect your direct contribution eligibility. Your tax return filing status can also impact your eligibility to make direct Roth IRA contributions.
For instance, in 2024, you can contribute the full amount if you’re married filing jointly and your Modified Adjusted Gross Income (MAGI) is less than $230,000. If you’re single, you can contribute the full amount if your MAGI is less than $146,000.
There are also separate income limits for partial contributions: for single filers, you can make a partial Roth contribution if your MAGI is under $161,000, and for those who are married filing jointly, you can make a partial Roth contribution if your MAGI is under $240,000.
These income limits mean you must consider your total financial situation when choosing Roth IRA contributions as part of your retirement savings strategy.
Yes, you can. Contributing to a 401(k) and an IRA up to each account’s maximum annual contribution limit is possible. However, income limits, as well as whether you or your spouse has a 401(k) at work, may affect whether you can deduct traditional IRA contributions on your tax return.
A traditional tax-deferred IRA can give you a tax deduction for your contributions each year, but it’s not always a given. For married couples, if you or your spouse has a 401(k) or another retirement plan at work, your traditional IRA contribution may not be deductible depending on how much you earn.
Moreover, you can contribute directly to both an after-tax Roth IRA and a 401(k) if your income falls within the Roth IRA’s income requirements. If you’re a fan of the tax-free growth potential of a Roth, this could be a great choice.
If you earn too much to contribute directly to a Roth IRA, you might consider maintaining both a 401(k) and a traditional IRA (even though you may not receive a deduction for your contributions, you’ll still be able to contribute to a traditional IRA).
While the IRS sets contribution limits for retirement accounts, they note that some actions don’t count toward these limits. For instance, you can roll over investment money from one Roth IRA account to another or from a 401(k) into an IRA without impacting your annual contribution limit.
Similarly, funds rolled over from other qualified retirement plans into an IRA or funds converted from a traditional IRA to a Roth IRA are also exempt from these limits. Remember, it’s always wise to talk to a financial advisor or tax professional to fully understand the intricacies of these rules.
Understanding your 401(k) and IRA contribution limits can help you optimize your retirement savings strategy. By capitalizing on your employer’s matching contributions and utilizing catch-up contributions if you’re 50 or older, you can boost your savings significantly. But don’t forget about income phase-out ranges and their impact on traditional IRA deductions and Roth IRA eligibility.
If you want to take control of your retirement savings and complete a rollover, work with Capitalize to make it all happen. We’ll manage the entire process so it’s seamless and stress-free.
Learn more today to discover how we can help set up your financial future.
Reviewed by
