As we usher in the year 2024, it’s crucial for both employers and employees to stay abreast of the significant changes coming to 401(k) plans. These changes, brought about by the SECURE 2.0 Act, aim to make retirement savings more accessible and beneficial. From increased contribution limits to more penalty-free withdrawals, these updates represent a substantial shift in retirement planning. This blog post will delve into these changes, providing a comprehensive understanding of what they mean for your retirement savings strategy.
Increased 401(k) Contribution Limits
One of the most notable changes is the increase in 401(k) contribution limits. The Internal Revenue Service has raised the annual savings limit to $23,000, up from $22,500 in 2023. This allows workers to tuck away an extra $500 in their 401(k) plans in 2024. The catch-up contribution for people who turn 50 years old remains steady in 2024 at an extra $7,500 annually, for a total savings limit of $30,500.
Source: Internal Revenue Service
After-Tax Roth 401(k) Contributions
Employees who have access to both pre-tax 401(k) and after-tax Roth 401(k) plans can contribute to either contribution type or divide savings between both, but the maximum amount workers can save remains at $23,000 ($30,500 for those 50 years or older). The SECURE 2.0 Act of 2022 has introduced several specific changes to after-tax Roth contributions in 401(k) plans that will go into effect in 2024:
Roth Employer Matches: Employers now have the option to make matching contributions on a ROTH basis if desired by the participant. Unlike many provisions of the new law, this went into effect immediately upon passage of the act. However, it is optional and employers may still elect to make pre-tax matches or they may not provide a company match at all.
No More Roth 401(k) Required Minimum Distributions: Required minimum distributions (RMDs) are mandatory annual withdrawals that generally all workers must take from their retirement accounts beginning in the year they turn 73. Roth IRAs don’t have RMDs because you’ve already paid taxes on your savings when you made your contributions, so withdrawals are tax-free. But curiously, Roth 401(k) savers still had to take RMDs, even though these accounts are also funded with after-tax dollars. The SECURE 2.0 Act has eliminated RMDs for Roth 401(k)s.
Catch-Up Contributions: The Secure 2.0 Act of 2022 modified these rules to require that any Catch-Up Contributions (if permitted by the Plan) made by employees earning $145,000 or more per year, must be treated only as post-tax, ROTH contributions, effective January 1, 2024.
More Penalty-Free Withdrawal Options
The SECURE 2.0 Act of 2022 has introduced several specific withdrawal option changes to 401(k) plans that will go into effect in 2024:
Withdrawals for Emergency Expenses: An exception has been provided for certain distributions used for emergency expenses, which are unforeseeable or immediate financial needs relating to personal or family emergency expenses. Only one distribution is permissible per year of up to $1,000, and a participant has the option to repay the distribution within three years.
Student Loan Payments as Deferrals for Matching Contributions: Employers are permitted to make matching contributions under a 401(k) plan, 403(b) plan, governmental 457(b) plan, or SIMPLE IRA with respect to qualified student loan payments.
Withdrawals Relating to Domestic Abuse: Retirement plans can permit participants to self-certify that they experienced domestic abuse and withdraw the lesser of $10,000 (indexed for inflation) or 50% of the participant’s account.
Emergency Savings Accounts
As of January 1, 2024 plan sponsors are permitted to offer short-term Emergency Savings Accounts (ESAs) as part of a defined contribution plan. ESAs must be funded post-tax with Roth contributions, and participants may be automatically enrolled at a rate of up to 3% of compensation.
The new year is also a time for employees to check if their specific 401(k) plans have new benefits. Even if you can’t save the maximum, we believe it’s advisable to save enough to at least get any matching dollars offered by your employer. These changes are part of a broader effort to make retirement savings more accessible and beneficial to employees. As we move into 2024, it’s crucial for employees and employers alike to stay informed about these changes and adjust their strategies accordingly.
Wells Fargo Advisors Financial Network is not a legal or tax advisor.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), member SPIC. Magellan Financial Heirloom Wealth Management Wells Fargo Advisors is a separate entity from WFAFN.