Retirement plan contribution limits: Your need-to-know

By:  Shelly Gigante

Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.

This article will ...

Tell you how much you may contribute depending the type of retirement account you have and your age.
Provide an analysis of how even a small increase in your retirement savings can increase your financial security.
Reveal what percent of your income you should save monthly for retirement.

There’s no time like the present to increase your retirement plan contributions, but those who commit more of their hard-earned salary to their retirement nest egg must be mindful of the IRS limit.

Indeed, the federal government places limits on the dollar amount individuals may contribute to tax-favored accounts each year, including individual retirement accounts and 401(k)s, which adjust annually to reflect cost-of-living increases.

The retirement plan contribution limit for 401(k), 457(b) and 403(b) plans is $22,500 for tax year 2023, climbing to $23,000 for tax year 2024. If you are age 50 or older by the end of the calendar year, you may be eligible to make additional catch-up contributions of up to $7,500 in both 2023 and 2024, bringing the total you may contribute on a pre-tax basis to $30,000 for 2023 and $30,500 in 2024.1 Beginning on January 1, 2025, those age 60 to 63 will be able to make annual catch-up contributions of up to $10,000 to a workplace plan, a new provision under the Secure Act 2.0.

The maximum yearly contribution to traditional and Roth IRAs is $6,500 for tax year 2023, and $7,000 for 2024. (Prior-year contributions for 2023 can be made up until the tax filing deadline on April 15, 2024.) The IRA catch‑up contribution limit for individuals aged 50 and over was amended under the SECURE 2.0 Act of 2022 (SECURE 2.0) to include an annual cost‑of‑living adjustment, but remains $1,000 for 2024. In the case of a Roth, you may not be eligible to contribute that much, however, depending on your income or your filing status.2

An additional preretirement “catch-up” provision exists for state and local government ffemployees, and some nonprofit workers who are eligible for a 457(b) plan, but the plan has to specifically allow the catch-up contribution in its terms. The special 457(b) preretirement catch-up is available during the three years prior to, but not including, the year in which plan participants will reach normal retirement age. Those who qualify can contribute the lesser of either the elective deferral limit ($22,500 in 2023) or the basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions).3

Thus, if your normal retirement age is 65, you would only be able to make 457(b) preretirement catch-up contributions during the years in which you were 64, 63, and 62. But in the years between ages 50 and 61, you have the option to take advantage of making the 50-years-or-older catch-up contributions.

If you do not plan to make 457(b) preretirement catch-up contributions, you can instead make 50-years-or-older catch-up contributions from age 50 until the year you retire.

Beginning in 2024, Secure Act 2.0 also authorized employers to add an emergency savings account to their defined contribution retirement plans. Eligible employees who opt to contribute can funnel up to $2,500 per year (or lower, as set by the employer) into these accounts. Unlike savings in a 401(k) or IRA, account holders can make withdrawals from their emergency account both tax- and penalty-free before age 59 ½, offering greater financial flexibility.4

Big returns

Even a minor increase to your retirement account contribution can yield big returns for your long-term financial security.

A 30-year-old woman making $60,000 a year with nothing yet saved for retirement would accumulate $917,749 by age 65 if she contributed 5 percent of her salary to her retirement plan. That assumes a 3 percent raise per year, a hypothetical 7 percent annual investment return, and 50 percent employer match, up to 6 percent of her salary, according to the AARP 401(k) calculator.

If she instead contributed 10 percent of her salary each year with the same assumptions, her retirement savings account would total $1,591,000.

“Most people are going to fall well short of their savings goal, so you should always save as much as you can, but at least enough to get the employer match,” said Matt Rutledge, a research economist at the Center for Retirement Research at Boston College. “You don’t want to leave money on the table.”

Many financial professionals recommend retirement savers sock away between 10 percent and 15 percent of their income annually. But that is merely a guideline.

It all depends on the age you start saving, said Rutledge.

“If you start saving early, at around age 20, you can afford to save 10 percent of your salary, but if you wait until age 30 to start saving, you will need to increase your contribution to 15 percent or more because you will have lost some of the power of compounded growth,” he said. “The earlier you start saving, the easier it is to hit your goals.”

Those percentage targets include the employer match, “so it may be a little easier than you think” to save a sufficient amount, said Rutledge.

To estimate how much money you will need to retire comfortably, project your future expenses and calculate your guaranteed sources of income from Social Security, annuities, and any pensions you may have.

The difference is what you will need to generate from personal savings and investments to fund your monthly living expenses.

A 4 percent withdrawal rate from your nest egg, adjusted annually for inflation, is generally considered to be a safe target to ensure that you don’t outlive your retirement savings.

But once again, retirement planning is not one size fits all. You may be able to withdraw more (or less) depending on the amount you have saved, your life expectancy, the return on your investments, and your monthly living expenses.

You may also be able to mitigate the risk of outliving your retirement accounts by purchasing a deferred income annuity, which can act as longevity insurance, said Rutledge.

Such products provide guaranteed income for life starting at a specified point in the future.

Deferred income annuities “make a lot of sense for a lot of people, because you don’t have to worry so much about whether a 4 percent withdrawal rate is right,” said Rutledge. “You can spend your savings a little more freely, because you know that you only need to make your money last until the (annuity) kicks in.”

Annuities are generally purchased with after-tax money. There also exists a certain annuity contract that can be purchased with money from a qualified retirement plan.

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