How maxing out your retirement accounts every year can pay off
Consider increasing your contributions to your IRA and 401(k) to the maximum limit so that you’re not missing out on any potential growth or tax benefits.
Saving any amount of money towards retirement is good — but if you can, consider contributing the maximum amount allowed by the IRS to your IRA and 401(k) plan every year.
Not only can maxing out your IRA and 401(k) make a huge difference to your retirement savings over time, but it can also provide potential tax benefits to you today and in the future. An Ameriprise financial advisor can help you create a personalized retirement savings strategy that takes full advantage of all the different retirement accounts available to you.
When you’re ready to reach out to an Ameriprise financial advisor for a complimentary initial consultation, consider bringing these questions to your meeting.
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Here’s how making the maximum contribution to your retirement accounts can significantly boost your savings over time.
What are the 2024 retirement account contribution limits?
Maximum individual contribution and catch-up contribution limits
|
Retirement account |
Annual individual contribution limit |
Catch-up contribution* |
Total individual contribution* |
|---|---|---|---|
|
Traditional and Roth IRAs |
$7,000 |
$1,000 |
$8,000 |
|
SIMPLE IRA and SIMPLE 401(k) |
$16,000 |
$3,500 |
$19,500 |
|
401(k), 403(b), 457(b), Roth 401(k) and Roth 403(b) |
$23,000 |
$7,500 |
$30,500 |
*Individuals 50 years or older can make catch-up contributions to IRAs and most workplace retirement plans. These special contributions are in addition to the regular contribution limits. To find out if you’re eligible to contribute to an IRA, please review these requirements.
Advice spotlight
Even if you can’t max out your 401(k) contributions, make sure you’re contributing enough to qualify for the maximum employer matching contribution, if offered. An employer match is essentially free money, so you don’t want to miss out on it.
Running the numbers: Is the maximum contribution worth it?
Making the maximum contributions to your retirement accounts can provide a significant boost to your retirement savings.
Below, we illustrate the powerful effect that making the annual maximum contribution to your IRA can have on the overall value of your retirement portfolio. For example, let’s say you contribute $1,200 to your IRA on an annual basis over a 10-year period. With an annual, compounded return of 6%, your savings would total $16,766. On the other hand, if you are age 55 and can contribute the maximum of $7,000 and the $1,000 catch-up contribution for 10 years, you would end with a balance of $111,773.
The numbers in the chart assume a 6% return over a time horizon of 10 years. This illustration is hypothetical and is not meant to represent a specific investment or imply any guaranteed rate of return.
*You must be at least 50 years old to make the $1,000 catch-up contribution.
The savings opportunities are even more impactful for workplace plans, such as a 401(k) and 403(b), which have higher contribution limits. For instance, let’s say you contribute $5,000 to your 401(k) on an annual basis over a 10-year period. With an annual, compounded return of 6%, your savings would total $69,858. On the other hand, if you are age 55 and can contribute the maximum of $23,000 with a $7,500 catch-up contribution for 10 years, you would end with a balance of $426,135.
Further, pre-tax contributions to 401(k) plans have the immediate benefit of lowering your taxable income, which means a lower tax bill in the near term. And some employer-sponsored plans offer employer matching contributions, which can provide an even greater benefit.
The numbers in the chart assume a 6% return over a time horizon of 10 years. This illustration is hypothetical and is not meant to represent a specific investment or imply any guaranteed rate of return. It also does not account for any matching contributions from an employer.
*You must be at least 50 years old to make the $7,500 catch-up contribution.
Advice spotlight
If you’ve already contributed the maximum to all your eligible retirement accounts, consider whether your plan allows you to make after-tax contributions to your 401(k) plan. This strategy, sometimes called the mega backdoor Roth IRA, takes advantage of the fact that after-tax contributions to a 401(k) don’t count against the $23,000 deferral limit ($30,500 if age 50 or older). That means you may be able to contribute up to the overall limit of $69,000 ($76,500 if age 50 or older) for 2024 and later roll these assets over to a Roth IRA.
Are you taking full advantage of your retirement accounts?
An Ameriprise financial advisor can help you determine what types of savings or investments are appropriate for your situation.
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