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.
You can skip this article if you think:
You can be a great stock picker and beat the market.
You can be a day trader and generate high returns.
You can trade options and produce above average results.
You can deploy a sector investing strategy and beat the market.
You can trade bonds to generate high returns.
You can trade commodities successfully.
You can trade cryptocurrencies successfully.
The odds of being successful at any of the above strategies in the long-term is less than 1%. Those strategies will also require a time investment of two hours per day or more.
If you choose to pursue one of these paths, good luck to you. Many people feel the need to try to be a financial wizard and expert trader. After they have tried and failed at these approaches, they are ready to hear what I will be covering in this article.
Once people can get past the dream of outwitting the market, their investing life can be simpler, and their investing results will be better and more consistent. Simple beats complex in investing. Spending less time on investing and investing the right way also wins. There are NOT too many areas in life where you can do less work and win. Take advantage of this rare situation.
In investing, you do NOT need to know about:
Fancy investing terms like P/E ratios and PEG ratios and Profit Margins and Market Share, etc.
Bonds
Commodities
Passive Real Estate Investing
Stock Options Trading
Fancy Technical Analysis and Graphs
Asset Allocation and Rebalancing
All you need to know about investing is:
Stocks beat all other asset classes in the long run
Large cap ETFs beat all other stock investments in the long run
Which large cap ETFs to invest in
Once you learn that, you are pretty much done. You can be very comfortable earning about 10% per year on your investments.
If you are okay living through stock market meltdowns and following the industry’s recommended strategy of Buy & Hold you are done. If you are not okay with getting crushed in stock market collapses and you want to earn higher investment returns, our Market Signals investment service has you covered. It is simple and easy to follow along with our recommendations.
When you simplify and improve your investing this way, you can concentrate on the important work of saving and investing as much money as you can. You can also free up time to focus on doing the things you enjoy.
Simplify and Enjoy!
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.
Stocks have been declining for the last three weeks. The markets needed to take a breather after the big gains posted since November of 2023. Recent inflation and interest data along with news from the Middle East are weighing on the markets.
Looking at the graph below, we see the strong steady move off the lows reached in October of 2022. There were a couple of small reversals in early 2023 and a sharp reversal in October of 2023. Between November of last year and the third week of March this year, the S&P 500 and the Nasdaq (top two lines) have moved sharply higher. All three major stock indices have pulled back in the last three weeks.
Notice how the Russell 2000 index is still 20% below its all-time high reached at the end of 2021. Small cap stocks have still not recovered their losses in 2022.
Let’s take a look at bond pricing going back to 2020. The top or blue line below represents the price of intermediate term bonds and the orange line represents to price of long term bonds. Bond prices started falling in 2021 and fell off a cliff in mid 2022.
Unlike stocks, bonds have not rebounded in 2023 and 2024 because of the continued inflation and interest rate concerns. In fact, bond prices have been dropping in the last two months due to increases in interest rates.
I hope you have been paying attention to my ongoing recommendations to avoid bonds and anything other than large cap US index funds for your stock investments. The previous two charts clearly show the cost of holding small cap stocks and bonds. Target date fund investors and people who follow the asset allocation strategy that advisors pitch have gotten crushed over the last couple of years by following that bad investment strategy.
Recent inflation data has not been viewed positively by the market. The market is still expecting rate cuts from the Fed this year, but the inflation rate seems to have stalled out at around 3.5%. But those rate cuts are now expected to begin later than previously expected. Economic growth and employment data are still strong, but all eyes will be on inflation going forward.
If the recent price declines turn out to be more than just a temporary setback, Market Signals subscribers will have their saving protected against any worst case scenarios.
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.
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