In a welcome piece of news for Americans planning their retirement, the Internal Revenue Service (IRS) has announced an increase in retirement contribution limits for the year 2024. The increase is to account for the rising cost of living.
Okay, so it may be something they do annually, but it is a good planning tool! Knowing these amounts now allows you the opportunity to consider your budget for 2024 so that you can maximize your retirement savings. While retirement may be a while off for you, contributing to it now will help you be better prepared for when that day comes. As everyone older knows, time flies!
Additionally, these changes provide individuals with the potential to reduce their taxable income. With retirement plans that use pre-tax dollars, you are reducing your taxable income now. For those Roth accounts that are funded with after-tax monies, you have the potential of reducing your taxable income during your retirement years.
However, along with the good news, there are concerns and confusion surrounding retirement funding changes. Let’s look at newly announced IRS changes and related concerns.
Employer Contribution Plans
“The contribution limit for employees who participate in 401(k), 403(b), and most 457 plans, as well as the federal government’s Thrift Savings Plan is increased to $23,000, up from $22,500.
The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), and most 457 plans, as well as the federal government’s Thrift Savings Plan remains $7,500 for 2024. Therefore, participants in 401(k), 403(b), and most 457 plans, as well as the federal government’s Thrift Savings Plan who are 50 and older can contribute up to $30,500, starting in 2024. The catch-up contribution limit for employees 50 and over who participate in SIMPLE plans remains $3,500 for 2024.”
The Problem is that
- Those extra contributions must be made on a Roth basis, using after-tax money.
- Therefore, you wouldn’t be able to get tax deductions on those catch-up contributions as you would with typical 401(k) contributions, but you could withdraw the money tax-free when you retire.
- The SECURE 2.0 Roth catch-up contribution rule won’t apply to taxpayers making $144,999 or less in a tax year.
The problem arose when Congress inadvertently left out certain language in the law prohibiting either pre-tax or after-tax catch-up contributions.
To remedy this problem, new language is being developed which will likely require employers to set up employer-offered Roth features. Be on the look-out for this as it will be the first time that some employers will be able to offer Roth options to employees.
The Concern is that some financial experts argue that the existing catch-up contribution limit is insufficient to accommodate the needs of older individuals looking to bolster their retirement savings. This concern stems from the fact that medical expenses and the cost of living continue to rise, potentially overshadowing the benefit of these increased limits.
Confusion surrounding RMDs
For those who have saved for their retirement and now have reached the “golden years”, things have gotten pretty confusing over the last 5 years. The confusion largely revolves around the age for taking the Required Minimum Distributions (RMDs).
Secure 2.0 increased the RMD age to 73 in 2023. The age will ultimately move to 75 by 2033. (The change is due to increased life expectancy.) The big issue with changing the age is that if you didn’t take your RMD at the right age, the IRS penalized you 50% of the amount that you should have taken! Ouch! But due to SECURE 2.0, the penalty for missing RMDs or failing to take the appropriate amount has been reduced to 25% and can be as low as 10%. Still a difficult pill to swallow simply because bureaucracy is always changing the rules!
What you should do
It is essential for individuals to evaluate their specific financial situations, taking into account factors such as expected retirement age, current savings, and anticipated expenses in retirement. While the increased retirement contribution limits may not fully resolve the issue of rising expenses, it does offer a valuable opportunity for those who can afford to contribute more to their retirement accounts.
In addition, as the cost of living rises, the real value of the contributions may diminish. To counteract this, it is recommended that individuals regularly review their retirement savings and adjust their contributions as needed. Diversifying investments and considering alternative retirement vehicles, such as IRAs and Roth IRAs, can also help mitigate the impact of inflation.
In conclusion, while the increased contribution limits are a positive development, they are not a one-size-fits-all solution. It is crucial for individuals to consult with financial advisors, assess their unique circumstances, and make informed decisions regarding their retirement savings. With thoughtful planning and prudent financial management, these changes can be a valuable step towards a more secure retirement. Saunders Tax & Accounting is open Monday through Thursday from 9 am to 5 pm and is available online at www.SaundersTax.com. Awarded the Hagerstown Chamber of Commerce “2023 Small Business of the Year”, we have been providing a Less Taxing Life and More Prosperous Solutions since 1984!