With the 2025 tax season just a few months away, taxpayers should know the contribution limit to know if they contributed more than the limit or not to estimate their tax liability for the 2024 tax year. Taxpayers who contribute to their retirement through 401k plans can check the full details here.
401k Contribution Limits
The IRS announces the retirement plans IRAs contribution limits every year before the tax year, the contribution limit for the 2024 tax year was announced last year. The contribution limit applies from 01 January to 31 December of the particular year. The annual limit on retirement plans is enacted to ensure that high-income earners do not use the retirement plan contribution to reduce their tax bills and save for their retirement.
The contribution limit for the 2024 year was increased from the prior year 2023 by $500. This makes the 2024 401k contribution limit $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 all cost-of-living adjustments that can affect the pension plan and other items in 2024.
The 2024 contribution limit includes both Roth 401k and traditional 401k plans and elective employee salary deferrals. However, if you are older than 50 years, your contribution is increased by $7,500 for 2024, which results in a total of $30,500 higher than 2023. It is called catch-up contributions, and it remains unchanged for the 2024 tax year ($3500) in SIMPLE 401 k plans.
Conditions to deduct the 401k contribution from 2024 taxes
Taxpayers can deduct the contributions made to the 401k retirement plans if they meet certain requirements. During the tax year, if you or your spouse has a covered retirement plan at the employment, your tax deduction may be phased out or reduced based on your filing status and income, however, if you both are not covered with any retirement plan at work, your deduction will not phase out.
So, if you have a 401k account, you can check the ranges for 2024 tax deduction gradual decrease if their income reaches a certain limit for 2024:
- The married couples filed the tax return jointly and one of them made an IRA contribution which is covered by a workplace retirement plan, then your phase-out range for deduction is between $123,000 and $143,000, which increased from the prior year’s limit of $116,000 to $136,000.
- Single or unmarried individuals whose retirement plan is covered by the workplace plan will see their deduction phased out if their income ranges from $77,000 and $87,000, which was increased from the prior year’s range of $73,000 and $83,000.
- The married individuals who filed their tax returns separately and were covered by the workplace plan, their deduction will not phase out as it is dependent on cost-of-living adjustments, which makes it remain between $0 and $10,000.
- Now, the IRS contributor not covered by a workplace plan and has a spouse who has such plans will have a different deduction phase-out range for the 2024 tax year, between $230,000 and $240,000 hiked from the prior’s years range of $218,000 to $228,000.
For the ROTH IRA contributor, the deduction limit is increased between $146,000 and $161,000 for singles and heads of household, whereas for married couples who filed jointly is $230,000 and $240,000, and for married couples who filed their return separately it remains the same between $0 and $10,000.
What are the After-tax contribution 401k rules?
The after-tax 401k contribution means when you have contributed an amount for which you have already paid taxes, which happens when your taxable income for the current year is the same. The 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.
The taxpayers should understand that the after-tax contribution does not reduce their tax bills. However, it is effective to save more for retirement, hence you should get familiar with its rules:
- You can make an after-tax contribution when you have completed your contribution limit but the combined maximum limit for employees/ employer is still not met.
- You can make the after-tax contributions when you reach your Roth or pre-tax limits.
- The after-tax contributions can roll out as tax-free income in the future if they become a part of the Roth conversion mega backdoor. The mega backdoor allows the high earner who can’t contribute to a Roth IRA directly to contribute to their retirement.
SECURE.20 changes for 401k
The IRS has announced the following changes under the SECURE 2.0 Act, that allow automatic enrollment in retirement plans:
- The agency introduces changes in longevity annuity contracts, where $200,000 is the maximum amount you can contribute for the 2024 longevity annuity contract.
- The agency has increased the charitable distributions deductible limit to $105,000 for the 2024 tax year from the prior year’s limit of $100,000.
- The agency has raised the deductible limit for one-time elections to distribute the IRS in split-interest entities to $53,000 for the 2024 tax year from the prior’s year $50,000.
The above are the changes made by the agency for the 2024 tax year code in the 401k contribution limit for tax-deductible limit.
What if you contributed more than the 401k contribution limit?
If by any chance you contributed more than the contribution limit, you must correct it from your employee side by notifying your administrator. The administrator will distribute the excess deferral if your plan allows excess deferral distributions.
You must catch your excess contribution before the tax filing deadline to make the changes as the administrator will file a 1099-R confirming the distribution of the excess contribution. If you fail to do so, you may have to pay more taxes on the excess contribution.
Taxpayers with 401k retirement plans should check their taxable income, contribution limit, and deductible limit to ensure they complete their tax responsibilities without any errors and pay taxes on excess contributions.
