Navigating Key Changes to 401(k) Plans in 2024: Contribution Limits, Match Rules, and Part-Time Employee Eligibility

As we approach 2024, substantial changes are on the horizon for 401(k) plans in the United States. The Internal Revenue Service (IRS) is adjusting contribution limits, and provisions from the SECURE Act 2.0 are set to take effect. These changes aim to provide savers with more opportunities to enhance their retirement savings and better access to funds in emergencies. In this comprehensive guide, we'll delve into the three major changes, shedding light on the intricacies and implications for both new and experienced savers.

New Contribution Limits:

After a substantial increase in 2023, the 401(k) contribution limit for 2024 is set at $23,000 for tax-deferred or direct Roth contributions, with a catch-up contribution limit of $7,500 for individuals aged 50 and over. The overall total limit for contributions to a 401(k) is now $69,000, or $76,500 with catch-up contributions. To adapt to these changes, individuals consistently maxing out their 401(k) contributions may need to adjust their withholding to capitalize on the increased limits.

A New Way to Get Your Employer Match:

SECURE Act 2.0 introduces significant changes to 401(k) matching rules. For young workers, a notable change takes effect in 2024: if employees are paying down student loans, they may now be eligible to receive a 401(k) matching contribution from their employer for loan repayment. However, to take advantage of this option, employees must ensure that their employer's plan offers this feature.

Access in Case of Emergencies:

SECURE Act 2.0 introduces new exceptions for penalty-free withdrawals. Employees can now withdraw up to $1,000 for unforeseeable or immediate financial needs related to personal or family emergencies without incurring the 10% penalty. Additionally, a new emergency savings feature allows participants to contribute to a separate after-tax emergency savings account within the 401(k) plan. This account, capped at $2,500, offers penalty-free withdrawals.

Understanding the 2024 Changes:

As 2024 approaches, it is imperative for savers to familiarize themselves with the upcoming changes to 401(k) plans. These adjustments not only provide more opportunities for saving but also address the evolving needs and challenges individuals face throughout their careers. Whether you are just starting to save for retirement or are nearing the end of your working years, being aware of these changes allows you to make informed decisions about your financial future. The 401(k) remains a powerful tool for retirement planning, and adapting to these updates ensures that individuals can maximize the benefits of this popular retirement savings vehicle.

401(k) Contribution Basics:

Understanding the basics of 401(k) contributions is fundamental to effective retirement planning. A 401(k) account is an employer-sponsored savings plan that allows employees to invest for retirement while benefiting from tax advantages. Two main types of contributions exist: traditional and Roth.

Key Points for 2024 Contribution Limits:

In 2023, individual employees had a 401(k) contribution limit of $19,500. However, for 2024, this limit has increased to $20,500, allowing individuals to contribute an additional $1,000 toward their retirement savings. For those aged 50 and older, the catch-up contribution limit increases from $6,500 in 2023 to $7,000 in 2024. Employer-sponsored plans often offer matching contributions, contributing to greater incentives for employees to save for retirement.

Differentiating Traditional and Roth 401(k) Contributions:

The choice between traditional and Roth 401(k) contributions depends on individual financial goals, risk tolerance, and time horizon. Traditional 401(k) contributions involve pre-tax contributions and tax-deferred growth. Roth 401(k) contributions involve after-tax contributions, offering tax-free growth and withdrawals.

Tax Advantages of 401(k) Contributions:

401(k) contributions significantly impact taxable income and current tax liability. Roth 401(k) contributions involve after-tax dollars, increasing the current tax liability. Yet, qualified withdrawals, including earnings, are tax-free in retirement.

Retirement Security Through High Contribution Limits:

The relatively high contribution limits of a 401(k) plan empower individuals to build substantial retirement nest eggs over their working years. Consistent contributions leverage the power of compound growth, ensuring a reliable source of income during retirement.

Employer Matching Contributions:

Employer matching contributions represent an additional boost to retirement savings, where employers match a percentage of an employee's salary contribution up to a specified limit. This "free money" enhances retirement savings without additional effort from employees.

Maximizing Contributions:

To maximize contributions to a 401(k) plan, employees should aim to contribute the maximum allowable amount, considering annual contribution limits set by the IRS. Utilizing catch-up contributions for those aged 50 and above and taking advantage of the full employer match are crucial strategies for optimizing retirement savings.

Review Contribution Limit Changes Annually:

The IRS annually adjusts contribution limits for retirement accounts, necessitating regular reviews to stay informed about updates. Staying aware of these changes allows individuals to adjust contributions, ensuring compliance with IRS regulations and optimizing tax planning.

Part-Time Employee Eligibility:

Starting in 2024, companies sponsoring 401(k) plans will be required to allow part-time employees to participate in their qualified retirement plans.

Full-Time Employee Restriction:

Prior to the passing of the Secure Act 1.0 in December 2019, 401(k) plans were allowed to limit participation to employees who had completed one year of service, defined as 12 months of employment AND 1,000 hours worked within that 12-month period.

Secure Act 1.0:

Secure Act 1.0, passed in December 2019, required 401(k) plans to cover part-time employees who had completed three consecutive years of service and worked 500 or more hours during each of those years. Example: John, working part-time since March 2020, becomes eligible to participate in the plan starting January 1, 2024.

Secure Act 2.0:

Secure Act 2.0, passed in December 2022, reduced the consecutive years requirement to two starting in 2025. The 500 hours per year condition remains. In 2025, companies will need to include part-time employees who have worked 500 hours or more in each of the preceding two years. Example: Jane, working part-time since January 2023, becomes eligible to participate in the plan starting January 1, 2025. Employers should ensure their plan documents are updated to reflect this change and communicate the new eligibility rules to part-time employees.

Conclusion:

Navigating the changes to 401(k) plans in 2024 requires a comprehensive understanding of contribution limits, matching rules, and new eligibility criteria for part-time employees. Savers and employers alike must stay informed about these adjustments to make strategic decisions that align with their financial goals and retirement planning objectives. Adapting to these changes ensures that individuals can maximize the benefits of 401(k) plans and secure their financial future in retirement.

To help navigate your options in 2024, talk to one of our financial planners.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by GW Financial, Inc. to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2023 GW Financial, Inc.