As we step into 2024, several significant changes are on the horizon for retirement planning. These changes stem from both routine inflation adjustments and the continued implementation of Secure 2.0 provisions, impacting both retirement savers and retirees.
Inflation Adjustments and Tax Brackets
With the onset of 2024, inflation will lead to upward adjustments in tax brackets, retirement contribution limits, and estate and gift tax exemptions. These adjustments mean that income thresholds for both income and capital gains taxes will rise. For instance, the top marginal income tax rate of 37% will apply to single filers with incomes of $609,350 or more and married couples filing jointly with $731,200 or more, compared to $578,125 and $693,750 in 2023, respectively.
Potential Actions:
- Realizing Capital Gains: Higher income thresholds might offer more opportunities to sell appreciated securities without incurring capital gains taxes. For 2024, the 0% capital gains tax rate applies to single filers earning less than $47,025 and married couples filing jointly with incomes below $94,050.
- Roth Conversions: The increased income thresholds provide additional room for converting traditional IRA and 401(k) balances to Roth without moving into a higher tax bracket. Smaller, staged conversions can be beneficial, particularly in the post-retirement, pre-required minimum distribution phase.
No Required Minimum Distributions on Roth 401(k)s
Secure 2.0 brings a significant change: starting in 2024, Roth 401(k)s will no longer be subject to required minimum distributions (RMDs), aligning them with Roth IRAs.
Potential Action:
- Maintaining Roth 401(k)s: Investors no longer need to roll over Roth 401(k) assets into Roth IRAs to avoid RMDs, especially if their plans have low costs and excellent investment options. This change is particularly beneficial for younger savers contributing to Roth 401(k)s over the long term.
Increased Contribution Limits for Retirement Accounts
Inflation has also led to an increase in contribution limits for retirement accounts. In 2024, the limits for company retirement plans (401(k), 403(b), 457) rise to $23,000 for those under 50 and $30,500 for those 50 and over. IRA contribution limits will increase to $7,000 for those under 50 and $8,000 for those 50 and over. The total 401(k) contribution limit will be $69,000, plus an additional $7,500 for savers over 50.
Potential Action:
- Reviewing Contributions: Now is an excellent time to revisit and possibly increase your company retirement plan and HSA contributions. Ensure you’re maximizing employer-matching contributions and consider setting up automatic monthly IRA contributions.
Higher Qualified Charitable Distribution Limit
The qualified charitable distribution (QCD) limit for individuals over 70.5 years old will increase to $105,000 in 2024, up from $100,000. Secure 2.0 indexed this limit to inflation and introduced the possibility of using a charitable gift annuity.
Potential Action:
- Utilizing QCDs: For charitably inclined individuals over 70.5 with IRAs, QCDs can offer significant tax benefits by avoiding income taxes and satisfying RMDs for those aged 73 and above.
Higher Estate and Gift Tax Thresholds
In 2024, the estate tax exemption will rise to $13.61 million per person, allowing married couples to shield more than $27 million from federal estate taxes. The gift tax exclusion will increase to $18,000 per individual and $36,000 for couples.
Potential Action:
- Estate Planning: High-net-worth individuals should plan for the expiration of the Tax Cuts and Jobs Act in 2025, which will reduce the estate tax exemption. Consulting with an estate planner can help optimize strategies to minimize estate taxes.
529 Rollover to Roth IRA
From 2024, Secure 2.0 allows rollovers of up to $35,000 of unused 529 assets to a Roth IRA, provided the 529 beneficiary has owned the account for at least 15 years.
Potential Action:
- Utilizing 529 Rollovers: This provision offers a solution for beneficiaries who received scholarships or didn’t attend college, easing parental concerns about oversaving in a 529 plan.
Enhanced Flexibility for 401(k) Savers
Secure 2.0 introduces several new features for retirement plans in 2024. Employers can now make matching contributions to retirement plans for employees repaying student loans and offer emergency savings options, including sidecar funds and penalty-free withdrawals for emergencies.
Potential Action:
- Exploring New Plan Features: If these new features interest you, discuss them with your benefits team to see if they will be included in your organization’s retirement plan offerings.
Changes to Prescription Drug Costs and Long-Term Care Premium Deductibility
Some provisions of the Inflation Reduction Act of 2022 will reduce out-of-pocket prescription drug costs for Medicare-covered seniors in 2024. Additionally, the deductible amounts for long-term care insurance premiums will decrease slightly in 2024.
Stay informed about these changes to maximize your retirement savings and benefits in 2024.