Strategies for Maximizing Your 401k in 2024

Wealth Advisor

In this video, Chris Pavcic  outlines strategies for maximizing contributions to a 401k plan in 2024, emphasizing the total contribution limit of $69,000, which encompasses individual and employer contributions, including matches and profit shares. It corrects the common misconception that the limit is $23,000, clarifying that this figure represents the individual contribution limit for Roth or pretax contributions under the 402(g) limit. For high-income earners, it highlights the importance of understanding the maximum includable compensation ($345,000 for the year) for employer match calculations and the strategy to ensure receiving the full match without leaving any “free money” on the table. Additionally, it explains the “mega backdoor Roth strategy,” which involves making after-tax contributions up to the total allowed limit and then converting these to a Roth 401k for tax-free growth, emphasizing the need for plans to allow after-tax contributions and in-plan Roth conversions to utilize this strategy effectively.

 

Video Transcript

You. So today we’re going to be talking about 2024 401k planning. So for this year, the total amount that can go into a 401k is $69,000. That’s between your contributions, your employer contributions, like any matching or profit share contributions. So let’s get into it. So if you have a 401k, again, 69,000 total that can go in this limit is known as what’s called a four one five c limit in the planning industry. And again, this is the total that can go in between what you’re contributing, what your employer is contributing, just the total that can go into the plan. Common misconception that we hear is that the total is 23,000. That’s what’s called your 402 g limit. So out of this amount, this is the amount that you can do as either Roth or pretax for the year.

 

But on top of that, you can again fill the gap between the 23 and the 69,000 to fully maximize the plan if your employer allows it. So specifically, a couple of things that you want to look out for if you’re a high income earner, employer matching contributions. These are based off of only the first 345,000 that you earn for this year. So important to know. This is called the maximum includable compensation figure for the year. So if your employer, for example, gives you a 3% employer match, this works out to 10,350.

 

It’s going to be really important that if you’re somebody that’s looking to max out the plan early in the year over the first couple of pay periods, make sure that you look at your plan documents to make sure that you’re getting the full max match, because that match is, again, it’s based off the first 345,000 that you earn. So if you accelerate your contributions and you haven’t hit that 345 yet for your income, you’re not going to get the full 3% match. So very important that we’re not leaving any free money on the table through these contributions. So next, I wanted to go through something called what’s called the mega backdoor Roth strategy. And this is available if your plan allows for, one, the ability to make what are called after tax contributions, and then also your ability to do in plan Roth conversions.

 

So, very important, we need to make sure that both of these two things are available inside of your plan. So let’s go through an example here. So again, we’re looking to get the full 69,000 in for the calendar year. So total limit here, 69,000. So what factors into this are one your contributions. So that’s going back to that 402 g 23,000. Here. Let’s say that your match is 3% going off of that 345 figure that we use. That’s 10,350 that can go into the plan as the match. So that leaves a gap of 35,650 that can go, that’s left that we can technically contribute to the plan. So that’s where these after tax contributions come into play. And we want to contribute that 35,650 to the after tax 401k. If we leave that as an after tax contribution, it’s going to grow tax free.

 

You’re not going to owe any tax as that money is growing. But if we don’t take the second step and convert it to the Roth 401K, all of that growth is going to be captured on the back end whenever you eventually take the money out. And all of that growth will be taxable to you as income. So really important that we do this fourth step, a Roth conversion, and we actually take that 35,000 and we flip it to the Roth 401K in the current tax year. So whenever we do that, there may be a little bit of tax. So say the 35,000, say it grows to 40 over the course of the year. You’re going to owe tax on that difference, the 5000 of growth in the current tax year.

 

But in exchange, this full 40,000 moves into the Roth, where it all grows and distributes 100% tax free. So that’s how somebody would go about funding the full 69,000 into a 401K plan for the 2024 tax year. Again, really important to keep those limits in mind, making sure that you’re getting the maximum free money from your employer match. Important to keep that in mind if you’re looking to accelerate contributions, but definitely an important topic and one that we talk through with all of our clients. So let us know in the comments if you have any questions here. Close.

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