Tax law changes affect your retirement planning in 2024
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Key takeaways:
- There are important deadlines for when individuals must begin retirement account withdrawals.
- Contribution limits for a traditional or Roth IRA have increased for 2024.
As we enter the second half of 2024, it is important to understand some tax law changes that became effective this year and could affect your retirement savings and tax planning.
From higher contribution limits to new rules for Roth IRA rollovers, these modifications could have a significant impact on your financial strategies. Here is a closer look at some recent changes, so you can make informed decisions about your retirement. As many physicians focus on these planning issues in the third and fourth quarters of the calendar year, we thought it timely to provide this article now.
Required minimum distributions
Required minimum distributions (RMDs) are an important part of planning during retirement for holders of most types of retirement savings accounts. The notable exception is Roth IRAs, which are not subject to annual required withdrawals while the owner is alive. Starting with the 2024 tax year, this exception will also apply to Roth 401(k) and 403(b) accounts.
In the past, an easy way to address that Roth 401(k)s were subject to RMDs was to roll those assets into a Roth IRA upon retirement. (Roth IRAs do not have RMDs.) Now though, Roth 401(k) investors with particularly good plans (minimal costs and stellar investment options) should not 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 than those who are closer to retirement.
The IRS uses a calculation based on the account balance and your life expectancy to determine the minimum you must take out each year. You will owe federal income taxes on the withdrawal at your ordinary income tax rate.
Most people subject to RMDs must make their withdrawal for the tax year by the last day of that year. In your first year of eligibility, however, you have until April 1 of the following year. Secure 2.0 brought changes to the RMD in two phases. First, the RMD age increased to 73 years in 2023. In 2033, the RMD age will increase further to 75 years. Individuals born between 1951 and 1959 must start their RMDs at age 73 years. Those born in 1960 or later can delay RMDs until age 75 years.
There are important deadlines for when individuals must begin retirement account withdrawals. Thus, if you will turn or have already turned 73 years old in 2024, you have until April 1, 2025, to make your first RMD. Anyone who was already 73 years or older by the start of 2024 must make their withdrawal by the year’s end.
The penalty for failing to meet the deadline for taking your RMD is 25% of the amount by which your withdrawal fell short of the required minimum. This penalty can be reduced to 10%, or waived entirely, if you make the full withdrawal and file the required forms with the IRS in a timely manner.
529 rollover to Roth IRA
529 plans have been great educational tools to help families save money for college and use that money, tax-free, to pay for college expenses. While the plans are still relatively young, they continue to adapt and offer new benefits as their popularity grows.
Another provision of Secure 2.0 became effective in 2024 — rollovers of unused 529 assets to a Roth IRA. While 529 funds are supposed to be earmarked for education expenses, this new Roth IRA transfer provision provides a workaround for parents or grandparents who worry that funds will be stranded in 529 plans by children who do not use them.
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 is $7,000 for contributors under age 50 years. Note that $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) during a 5-year period.
IRA and 401(k) contribution limits increase
Thanks to increases in IRA and 401(k) contribution limits, you can soon save more money for retirement.
Traditional and Roth IRA
Contribution limits for a traditional or Roth IRA have increased for 2024:
- The limit on annual contributions to an IRA increased to $7,000 in 2024, up from $6,500.
- Catch-up contributions for taxpayers over 50 are available, but these limits remain unchanged for 2024 at $1,000 ($8,000 total). The income thresholds to be eligible for a Roth IRA are also higher in 2024. For single and head-of-household taxpayers, the income phase-out range is between $146,000 and $161,000, up from between $138,000 and $153,000 in 2023. Married couples filing jointly have a higher income phase-out range, between $230,000 and $240,000, up from between $218,000 and $228,000.
401(k) and other employer-sponsored plans
Individuals can contribute more to their 401(k) plans and other employer-sponsored plans in 2024:
- Contribution limits for employees who participate in 401(k), 403(b) and most 457 plans, as well as the federal government's Thrift Savings Plan, will increase to $23,000 in 2024, up from $22,500.
- Participants in 401(k), 403(b) and most 457 plans, as well as the federal government's Thrift Savings Plan who are 50 years and older, can contribute up to $30,500, starting in 2024.
- The maximum contribution set by the IRS does not include what your employer can contribute in matching funds. The limit on combined employee and employer contributions is $69,000, up from $66,000 in 2023.
- The catch-up contribution for employees 50 years and older who contribute to a SIMPLE IRA remains at $3,500.
Conclusion
Retirement can be a financially confusing time as laws and rules seem to change every year. The decisions on how much to set aside for retirement and in what types of savings vehicles are best determined through careful planning. This year, new rules impacting RMDs, 529 Plans and Roth IRAs are just a few of the important factors to discuss with your financial advisor as you develop and update a comprehensive retirement strategy.
For more information:
Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free in print or by ebook download by texting HEALIO to 844-418-1212 or at www.ojmbookstore.com. Enter code HEALIO at checkout.
David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com, where Bob Peelman is a partner and director of wealth advisors. You should seek professional tax and legal advice before implementing any strategy discussed herein. Mandell and Peelman can be reached at mandell@ojmgroup.com or 877-656-4362.
Editor’s note: Healio wants to hear from you! Our Residency to Retirement authors cover all facets of financial planning, asset protection, insurance, investment and tax planning. What topics should our authors cover next? Email Kristine Houck at khouck@healio.com with your suggestions.
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