2024 Tax Changes For Your 401(k) And Ira What To Know

How Tax Changes Impact Your 401(k) and IRA Savings

As the saying goes: “In this world, nothing can be said to be certain, except death and taxes.” But what about the taxes that creep up on you, quietly changing the landscape of your retirement savings without you even knowing it? Enter tax changes—those changes in the law that can impact your 401(k) and IRA savings big time.

You’re here because you want to get to the bottom of the BIG question: How do tax changes affect my 401(k) and IRA? Read on. We’re going to get into the recent tax changes, how they affect your retirement accounts and what you can do to protect your hard-earned nest egg.

Tax Changes: What You Need to Know

First things first—what are these tax changes? Tax laws are not set in stone; they change with new legislation, economic conditions and political priorities. Changes can affect contribution limits, withdrawal rules and taxation of distributions all of which can have a big impact on your retirement savings strategy.

According to the Internal Revenue Service (IRS) staying informed about tax law changes is key to effective financial planning especially when it comes to retirement accounts like 401(k)s and IRAs.

How the SECURE Act Reshapes Your Retirement

One of the biggest changes to retirement savings in recent years is the Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in December 2019 and further expanded by the SECURE 2.0 Act in December 2022.

Required Minimum Distributions (RMDs) Age Increase

The SECURE Act initially raised the RMD age from 70½ to 72. However, the SECURE 2.0 Act increased this age further to 73, starting in 2023. This gives account holders more time for their savings to grow tax-deferred. Failing to take RMDs when required can result in a penalty, though it has been reduced from 50% to 25%, and it can be further reduced to 10% if corrected in a timely manner.

Learn More: Retirement Plans FAQs Regarding Required Minimum Distributions

Elimination of the Stretch IRA

Before the SECURE Act, beneficiaries could “stretch” the distributions from an inherited IRA over their lifetime. The SECURE Act eliminated this option for most non-spouse beneficiaries, requiring the entire inherited IRA to be distributed within 10 years. This can push beneficiaries into higher tax brackets during the distribution period.

Learn More: Fidelity Investments on the SECURE Act

CARES Act Emergency Relief

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act made temporary changes to retirement account rules.

Waiver of RMDs for 2020

The CARES Act waived RMDs for 2020 so you could skip your required withdrawals for the year without penalty. This was a one time relief to help you manage your accounts during the market volatility caused by the pandemic.

Required Minimum Age Increase

The SECURE 2.0 Act has since made more changes, increasing the age for RMDs. As of 2023, the RMD age is 73, so you have more time to let your money grow tax-deferred. If you were born in 1951 or later, RMDs start at 73 and RMD age will be 75 in 2033.

Learn More: Treasury, IRS Issue Updated Guidance on Required Minimum Distributions

Penalty-Free Withdrawals

The CARES Act also allowed qualified individuals to take up to $100,000 from their retirement accounts in 2020 without the 10% early withdrawal penalty. While this was immediate relief, you had to pay back within 3 years to avoid long-term taxes.

Learn More: Coronavirus Relief for Retirement Plans and IRAs

Learn More: IRS: New Law Provides Relief for Eligible Taxpayers Who Need Funds from IRAs and Other Retirement Plans

Tax Changes on the Horizon

Potential Future Tax Changes

Tax laws are always changing and there are discussions about potential changes that could impact retirement accounts, especially for high-income earners. No major changes have been announced yet but proposals have been made to adjust retirement account rules, including limiting tax benefits for high-income earners and changing contribution limits.

Learn More: Before Roth Conversion: Evaluate These Thresholds

Roth Conversions

With tax rates on the horizon, Roth conversions are getting a lot of attention. Converting a traditional IRA to a Roth IRA means paying taxes on the converted amount now but tax-free in retirement. This can be especially good if you expect future tax rates to be higher. But you need to consider how much income tax, capital gains tax and potential Medicare premium increases you may face as a result of the conversion.

Learn More: 401(k) vs. 457(b): Key Differences and Benefits

Vanguard says to consider both your current and future tax rates before converting. If you’re in a lower tax bracket now, converting while taxes are lower might be good but you need to plan carefully to avoid unintended consequences like higher Medicare premiums.

Strategies to Protect Your Retirement Savings

But don't throw your hands in the air yet. There are some strategies you can leverage to manage tax changes.

Stay Informed and Proactive

Knowledge is your first line of defense. Regularly review IRS updates and consult reputable financial news sources to stay abreast of changes that could affect your retirement accounts.

Maximizing Contributions Within Bounds

Maximize Contributions Within Limits: To really leverage tax-deferred or tax-free growth, contributions to a retirement plan need to be made up to the maximum allowed.
401(k) Contribution Limit: For 2024, the limit to contribute to a 401(k) is $23,000, but for individuals 50 years of age or older, a catch-up contribution of $7,500 applies. Thus, eligible individuals are permitted to contribute up to $30,500.
IRA Contribution Limits: For 2024, the contribution limit for Traditional and Roth IRAs is increased to $7,000, with an additional $1,000 in catch-up contributions allowed for those aged 50 or older; thus, the maximum possible contribution for eligible individuals will be $8,000.

Learn More: Smart Tax Strategies: Save Big on Your 2024 Taxes

Diversify Between Traditional and Roth Accounts

Balancing contributions between traditional and Roth accounts can provide flexibility in retirement. Such accounts offer tax deductions now while giving tax-free withdrawals later.

Plan Tax-Efficient Withdrawal Strategies

Recruit a finance advisor that will formulate an exit strategy that incurs less taxes, such as

Strategic RMD Planning: Plan your RMDs to avoid higher tax brackets.
Roth Conversions: Convert over several years to help minimize tax impacts.
Tax Loss Harvesting: Offset gains with losses in taxable accounts.

Seek Professional Advice

Navigating the complexities of tax laws isn't a DIY project. Consult a Certified Financial Planner (CFP) or a tax professional who can provide personalized strategies tailored to your financial situation. The Certified Financial Planner Board of Standards can help you find a qualified professional.

Avoiding Common Mistakes

Knowing your tax landscape is half the battle; the other half lies in eliminating common pitfalls that may cost more than expected.

Failure to Track Legislative Amendments

Since laws are always being amended, particularly when there is a revision, like the SECURE 2.0 Act, a tax plan may quickly become outdated. This usually means that opportunities are missed or that one gets hit hard with taxes. One should regularly check the IRS Retirement Plan Updates for retirement plan rules and updates.

Missing RMD Deadlines

Failure to take RMDs before the deadline incurs a penalty. A little-known law changed the RMD penalty for failing to take it from 50 percent to 25 percent on the amount not withdrawn, effective 2024. But if corrected in a timely manner, it may further be brought down to 10 percent. To avoid these penalties, consider setting up automatic distributions or mark your calendar to ensure timely withdrawals.

For the most current information and detailed guidance:

Beneficiary Designation Ignore

This is a good time to review and update beneficiary designations so that your estate plan is current with today's laws and does the least amount of damage regarding taxes.

The Big Picture

Tax moves that impact your 401(k) and IRAs are bigger, more consequential economic policy decisions and, therefore, priorities. Having this bigger picture will enable you to make strategic decisions instead of simply reacting to changes.

According to the Tax Policy Center, legislative adjustments often aim to balance economic growth with fiscal responsibility, affecting how retirement savings are taxed and regulated.

Your Retirement Action Plan

More importantly, your retirement accounts are more than just numbers. They represent freedom and peace of mind in the future. While tax changes add an unwelcome layer of complexity, they're not insurmountable obstacles.

By staying informed, adapting your strategies, and seeking professional guidance, you can navigate the shifting tax landscape and remain confident about your retirement prospects.

Now is the time to take control of your retirement planning. The earlier you take action, the better placed you will be to optimize savings and minimize tax liabilities.

Tools and Resources

In this digital age, all you have is so much at your fingertips to help you manage effectively your retirement savings.

Use tools like the AARP Retirement Calculator to project how your savings will work out and the likely impact of tax changes.
Personal Capital or Mint can help you budget and track your investment goals.
IRS Retirement Plans FAQs
Social Security Administration
Utilize the CFP Board's Find a CFP Professional tool to locate certified planners.

Conclusion

It is indeed confusing to try and untangle the hash of tax changes that will affect your 401(k) and IRA. Don't worry; knowledge is power. The more you know how these laws will affect your retirement savings, the better prepared you'll be.

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So, stay vigilant, be proactive and don't wait to get what you need when you need it to turn things to your advantage. Your future self will thank you.