401K AND IRA RULES

The IRS changes the 401K and IRA rules periodically, so I like to review them once a year for our followers.  In today’s post, I will be focusing on the rules for retirement contributions and access to those funds.

These rules only apply to tax-deferred accounts like 401K’s and IRA’s.  If you save for retirement in a taxable account, you can contribute any amount you wish and you have total access to those funds.

Contribution Limits

For 2024, the contribution limit for 401K accounts is $23,000 per year.  For IRA accounts, the limit is $7,000 per year.  The IRS allows for higher contributions for people over the age of 50.  The additional contribution amount allowed for those age 50 and over is $7,500 per year for 401K accounts and $1,000 per year for IRA accounts.  IRA limits apply to both traditional and Roth IRA accounts. 

For self-employed individuals, the SEP IRA limit is the lesser of $69,000 or 25% of compensation.

For 401K accounts that have a company match, the IRS limit for combined (employee and employer) contributions is $69,000.

Always make sure you are contributing enough to maximize the company match portion of the contribution.  This is free money.

All of your contributions plus the company match contributions plus any investment gains grow tax free until you begin withdrawing money in retirement.

But to qualify for all of the tax breaks, you need to leave the money in the account until you reach age 59 ½.  That is the tradeoff. 

Withdrawal Rules

After age 59 ½ or whenever you begin making withdrawals from your 401K or IRA accounts, you will pay taxes annually on the amount of money you withdraw from those accounts.

If you withdraw money from 401K or IRA accounts before the age of 59 ½, you will pay a tax penalty equal to 10% of the money you withdraw.

The IRS does allow for hardship exceptions to access the money before age 59 ½.  These exceptions cover things like large and unexpected medical expenses, foreclosure prevention, etc.  You should consult a tax professional to make sure you qualify for a hardship exception.

Loan Rules

The other way you can access money from your retirement account before age 59 ½ is via a loan against your 401K account.  Loans are not allowed against IRA accounts.

It is highly recommended that you avoid loans and early withdrawals as you lose the tax free and compound growth benefits associated with retirement accounts.  The money you withdraw and borrow stops growing in your retirement account.  You should not borrow against your 401K for discretionary expenses like travel or entertainment.

The rules for 401K loans often differ for each plan so check out your plan documents.

Some plans allow up to 50% of your account balance or up to a max of $50,000.

Typically, loans are paid back over a period of 5 years including interest.  In this case you are paying interest to yourself as the money goes back into your account.

If you leave your job, you may have to pay back the full amount of the loan in a short period of time.

In our next post on retirement account rules and regulations, we will review Required Minimum Distributions and best practices for withdrawals and IRA rollovers. 

Stay Disciplined My Friends,

Phil

---

Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.

Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.