Inflation adjustments and the phase-in of Secure 2.0 provisions have implications for retirement savers and retirees alike.
The dawning of 2024 will usher in more changes than usual on the retirement-planning front. As is typical with the turn of the calendar page, inflation will drive upward adjustments to tax brackets, retirement contribution limits, estate and gift tax exemption amounts, and more. In addition, the retirement legislation known as Secure 2.0 will continue to phase in, with implications for retirement savers and retirees alike.
Here’s a roundup of some of the key retirement-related changes to watch out for in 2024, as well as any planning-related moves to consider.
Higher Tax Brackets
Thanks to higher inflation, the income limits for tax brackets will be increasing in 2024. These changes affect the income thresholds for both income and capital gains taxes. The top marginal income tax rate is 37%, for example, but it applies to single filers with incomes of $609,350 or more and married couples filing jointly with $731,200 or more in income. (In 2023, those thresholds were $578,125 and $693,750, respectively.)
Potential Action Items
Realizing capital gains in the 0% range: Higher income thresholds may enhance the opportunity to sell appreciated securities without any 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 of less than $94,050.
Assessing the appropriateness of Roth conversions: You’ll owe ordinary income tax when you convert traditional IRA and 401(k) balances to Roth, but higher income thresholds provide additional headroom to convert without pushing yourself into a higher tax bracket. A series of smaller conversions can often make sense, especially in the postretirement, prerequired minimum distribution phase.
No Required Minimum Distributions on Roth 401(k)s
Owing to the legislation dubbed Secure 2.0, Roth 401(k)s will no longer be subject to required minimum distributions starting in 2024, which puts them on an equal footing with Roth IRAs.
Potential Action Item
It’s more like a nonaction item. In the past, an easy way to address that Roth 401(k)s were subject to required minimum distributions was to roll those assets into a Roth IRA upon retirement. (Roth IRAs don’t have RMDs.) Now, though, Roth 401(k) investors with particularly good plans (minimal costs, stellar investment options) shouldn’t feel any urgency to move assets out of their plans. This provision will become especially important to younger savers who have been able to contribute to Roth 401(k) plans for longer.
Higher Contribution Limits for Savers
Here’s another set of changes that relate to inflation: Contribution limits to retirement accounts are increasing slightly for 2024. Company retirement plan contributions—whether 401(k), 403(b), or 457—are going up to $23,000 for people under age 50 and $30,500 for savers who are 50-plus. Meanwhile, IRA contribution limits are going up to $7,000 for people under 50 and $8,000 for people who are 50-plus. The total 401(k) contribution limit—of particular interest to people contributing to aftertax 401(k)s—is $69,000, plus an additional $7,500 for savers over 50. Contributions to health savings accounts, which can be employed as stealth retirement accounts, are increasing as well, to $4,150 for people covered by an individual high-deductible health plan and $8,300 for people with family HDHP coverage. HSA savers who are 55 and older can contribute an additional $1,000. Note that the income limits that determine eligibility to make Roth IRA or deductible traditional IRA contributions have also increased to account for inflation.
Potential Action Item
If you haven’t revisited your company retirement plan and/or HSA contributions for a while, now is a good time to do so, especially if you’re in a position to make the maximum allowable contributions to your account(s). While you’re at it, make sure you’re maximizing any employer-matching contributions that you’re eligible to receive. And if you’ll turn 50 in 2024, remember that you don’t need to wait until your birthday to make catch-up contributions. I’m a big fan of putting IRA contributions on autopilot with your investment provider, making automatic monthly contributions, just as you do with your 401(k). To make the maximum allowable IRA contribution in 2024, you’d need to contribute $583 monthly if you’re under 50 and $666 a month if you’re 50 and over.
Higher Qualified Charitable Distribution Limit
People over age 70.5 can contribute $105,000 to charity via the qualified charitable distribution, or QCD, in 2024. While the QCD limit had been stuck at $100,000 for a number of years, Secure 2.0 indexed the limit to inflation. Secure 2.0 opened the door for people to use a charitable gift annuity.
Potential Action Item
Given that nearly 90% of taxpayers aren’t itemizing their deductions, the QCD is a gimme for charitably inclined people 70.5 and older who have IRAs. Contributed amounts skirt income taxes and also satisfy required minimum distributions for those who are age 73 or above. The QCD will tend to be a better deal, from a tax standpoint, than writing a check to charity and deducting it on your tax return.
Higher Estate, Gift Tax Thresholds
The amount of an estate that’s exempt from estate tax will increase to $13.61 million per person in 2024. That means that married couples can effectively shield more than $27 million from the federal estate tax. Meanwhile, the gift tax exclusion is increasing to $18,000 ($36,000 for couples) in 2024. That means that individuals can gift up to $18,000 to each recipient without having that amount count toward their gift-tax exclusion.
Potential Action Item
For people with very high levels of assets, it’s worth looking toward the end of 2025, when key provisions of the Tax Cuts and Jobs Act are set to expire. Among those provisions are the currently high levels of assets that are exempt from the federal estate tax. Barring congressional action, the estate tax exemption will snap back to pre-Tax Cuts and Jobs Act levels in 2026—approximately $7 million per person and $14 million for couples. And state estate tax thresholds are substantially lower in many cases. A qualified estate planner can help you determine the best strategies to reduce taxation on your estate (not to mention help with other crucial matters such as drafting powers of attorney).
529 Rollover to Roth IRA
Another provision of Secure 2.0 goes into effect starting in 2024: rollovers of unused 529 assets to a Roth IRA. Provided a 529 beneficiary has owned the 529 for at least 15 years, up to $35,000 can be rolled into a Roth IRA, subject to the beneficiary’s annual IRA income contribution limits. In 2024, that’s $7,000 for contributors under age 50. The $35,000 is a lifetime limit, meaning that someone with $35,000 in unused 529 assets could roll over $7,000 per year (today’s contribution limit) over a five-year period.
Potential Action Item
The ability to roll over unused 529 assets to a Roth IRA is an elegant solution in situations when the beneficiary received a scholarship or didn’t go to college. Moreover, the escape hatch can help allay parental worries about oversaving in a 529.
More Flexibility for 401(k) Savers
Several provisions related to retirement plans go into effect in 2024, all resulting from Secure 2.0. In particular, companies will be able to make matching retirement plan contributions for employees who are paying down their student loans. In other words, the employee’s dollars go toward debt paydown, whereas the employer’s match goes into the retirement plan. Secure 2.0 makes it possible for employers to earn a tax break on that type of match. The specific matching formula—and whether the employer matches at all—depends on the employer.
Additionally, Secure 2.0 allows plans to offer options to help employees deal with emergency expenses. Plans can now offer what’s called a “sidecar fund” to enable employees to save for unexpected expenses; contributions would be capped at $2,500 or even lower and must be parked in investments that offer principal protection. Another option would allow employees to withdraw up to $1,000 per year for emergency expenses without the usual 10% penalty that applies to early withdrawals.
Potential Action Item
Not all plans will add these features right out of the box, if at all. If they’re of interest to you, reach out to the person or team that handles benefits in your organization.
Prescription Drug Costs
Mark Miller outlined some of the key changes to prescription drug costs for seniors who are covered by Medicare. Specifically, some provisions of the Inflation Reduction Act of 2022 should reduce seniors’ out-of-pocket drug costs.
Long-Term-Care Premium Deductibility
Long-term-care insurance has declined in popularity, but there are still millions of policies in force. The amount of long-term-care insurance premium that one can deduct is actually going down a bit in 2024 relative to 2023. People who are age 40 or under can deduct $470 in long-term-care premiums in 2024; those aged 41 to 50 can deduct $880; people aged 51 to 60 can deduct $1,760; those aged 61 to 70 can deduct $4,710; and those 71 and older can deduct $5,880.
https://www.morningstar.com/retirement/whats-changing-retirement-2024