For 2024, there are some big retirement and tax planning opportunities to profit from. Are you ready to lower your tax bill and maximize the size of your nest egg?
In the coming year, some beneficial provisions of Secure Act 2.0 go into effect. Another reason to plan now is that tax rates will likely rise after 2025. Here's what experts suggest you consider, as the clock is ticking.
Time For That Roth IRA Conversion
With federal income tax rates set to increase after 2025, the next two years may be the best time for Roth IRA conversions. That allows you to lock in current rates, says Sarah Brenner, director of retirement education at Ed Slott & Co.
Others agree but also suggest being mindful of your tax bracket over many years. "Plan your taxes over several years, particularly with the changes scheduled to occur Jan. 1, 2026," said Lisa Featherngill, a senior vice president and national director of wealth planning at Comerica Wealth Management.
2024 Federal Income Tax Brackets And Rates
| Tax rate | Single | For married filing jointly | For head of household |
|---|---|---|---|
| 10% | $0 to $11,600 | $0 to $23,200 | $0 to $16,550 |
| 12% | $11,600 to $47,150 | $23,200 to $94,300 | $16,550 to $63,100 |
| 22% | $47,150 to $100,525 | $94,300 to $201,050 | $63,100 to $100,500 |
| 24% | $100,525 to $191,950 | $201,050 to $383,900 | $100,500 to $191,950 |
| 32% | $191,950 to $243,725 | $383,900 to $487,450 | $191,950 to $243,700 |
| 35% | $243,725 to $609,350 | $487,450 to $731,200 | $243,700 to $609,350 |
| 37% | $609,350 or more | $731,200 or more | $609,350 or more |
Source: Internal Revenue Service, "Revenue Procedure 2023-34."
"Determine if you will be in a lower bracket in 2024/2025 than 2026 and future. If so, consider a Roth conversion or partial Roth conversions in 2024 and 2025 to spread the tax payments," Featherngill said.
The benefit for your retirement and tax planning is that there will be no tax on growth in the Roth IRA account. Nor will there be any withdrawals if you wait five years after the first conversion date, she says.
When you convert a traditional IRA or other retirement account to a Roth IRA, a five-year waiting period starts before you can withdraw the converted amount without paying a 10% early-withdrawal penalty. In general, Roth IRAs are funded with after-tax dollars. The money in the account grows tax-free, and generally withdrawals are income-tax free.
Featherngill's advice: Start early to maximize the tax-free growth and start the five-year clock.
A Roth IRA conversion involves pulling money from your traditional IRA and depositing it into a Roth IRA. You will pay taxes on the distribution at your ordinary income tax rates. Take note of whether the distribution will place you into a higher tax rate, say from 12% to 22%, or from 24% to 32%.
Partial Conversions Help Avoid Higher Taxes
Many advisors recommend partial Roth IRA conversions over several years so that you don't bump yourself into a higher tax bracket. Also be mindful when doing a Roth IRA conversion that distribution from your traditional IRA may result in you paying a higher premium for Medicare Part B, Part C, and Part D. Premiums for Medicare Parts B, C and D are based on modified adjusted gross income.
You should also talk to a qualified tax expert about Roth IRA conversions if you own what's called a nondeductible traditional IRA. That's an IRA that's been funded with after-tax dollars rather than pretax dollars, as is the case with deductible IRAs.
New Secure Act 2.0 Provisions Coming In 2024
Several important Secure Act 2.0 provisions go into effect in 2024, affecting your retirement and tax planning, Brenner says.
Account owners can roll over unused funds from 529 college savings plans into a Roth IRA for the same beneficiary. That's up to a $35,000 lifetime limit, says Brenner. The 529 plan must have been open for at least 15 years before funds can be rolled over. Check with a qualified and competent IRA expert with respect to some of the other specifics related to this provision.
Brenner says that owners of workplace retirement plans and IRAs will be allowed one penalty-free withdrawal of up to $1,000 per year. That could be for unforeseen or immediate financial needs arising from personal or family emergencies, starting in 2024. Income taxes would still apply to the withdrawn amount.
In 2024, employers can start matching employee student loan payments with contributions to their workplace retirement plan. This aims to help employees pay down student debt while also saving for retirement. "If you're repaying student debt, determine if your company plan will be adopting the provision to treat student loan payments as retirement plan contributions for purposes of the employer match," said Featherngill.
Shape Up Your Health Savings Account
Health savings accounts, or HSAs, are hard to beat from a tax perspective, says Jaycob Keuning, a certified financial planner with Straight Path Wealth Management.
HSAs provide great retirement and tax planning advantages.
"They are triple tax advantaged, allowing for tax deductible contributions, tax-free growth on any investment earnings or interest, and tax-free withdrawals if used on qualified medical expenses," Keuning said.
READ: Health Savings Accounts: From Simple Savings To Investment Powerhouse
Additionally, there is no income phaseout for HSA contributions. "Even those in the top tax brackets can take advantage of HSA contributions," he said.
HSA Contributions Can Be Free Of Payroll Taxes
An important but often overlooked advantage is the ability for HSA contributions to also be payroll-tax free.
Taxpayers, Keuning notes, have the option to contribute to their HSA through payroll deductions or by writing a check to their HSA account.
"At first glance, those options seem to be equal," he said. "But when HSA contributions are made through employer payroll, they are not subject to payroll taxes. If a taxpayer writes a check to their HSA account, it will be with dollars that have already been subject to payroll taxes. They will, however, still receive an income tax deduction when they file IRS form 8889 with their federal tax return." The payroll tax consists of two parts: a 1.45% Medicare tax and a 6.2% Social Security tax.
Individuals can contribute up to $4,150 to their HSA accounts for 2024. Families can contribute up to $8,300. Individuals age 55 and older can contribute an additional $1,000. If you have the option to contribute to an HSA and 401(k) at work, consider the best contribution sequence based on the employer match.
A Vanguard research paper titled "Stretch your financial muscles: The unique flexibility of HSAs" says investors should:
- First, contribute to an employer plan (enough to get matching contributions).
- Second, contribute to an HSA. Then turn to tax-advantaged savings accounts (traditional/Roth IRAs and 529s).
- Lastly, contribute to taxable accounts.
Boost Catch-Up Contributions For Retirement And Tax Planning
According to Featherngill, retirement account owners should take note of the new catch-up contribution limits. They should boost their contributions if possible.
Current law says a plan may permit employees 50 and older to make catch-up contributions above otherwise-applicable limits. Catch-up contributions are limited to $7,500 for 2024 (and $3,500 for Simple plans). The IRA catch-up limit stays at $1,000 for 2024.
Effective Jan. 1, 2025, Secure 2.0 raises the catch-up limit for participants age 60 to 63 in employer-sponsored retirement plans to the greater of $10,000 or 150% of the then-current catch-up limit, Featherngill notes.
Catch-up contributions are still made on a pretax basis. That means you don't pay income tax on the amount contributed until you withdraw the money. This tax treatment continues at least until Jan. 1, 2026, based on current laws, according to Featherngill.
Maximize A Roth 401(k) Match
The Secure Act 2.0 lets employers match an employee's contributions to their traditional 401(k) plan by making equivalent contributions to the employee's Roth 401(k) account.
According to Keuning, 401(k) plans are always slow to roll out these changes to their plan documents. But in 2024, more employers may start offering this option.
"Prior to Secure Act 2.0, employer matching contributions had to be contributed on a pretax basis to a traditional 401(k)," he said. "For those who contribute to Roth 401(k)s, it's worth checking with their plan administrator to see if the Roth matching option is available."
Employees will, however, have to elect to have their employer match count toward their Roth. Keuning added: "They will owe taxes on any matching funds added to their Roth. Taxpayers who fall inside or under the 12% federal tax bracket benefit the most from Roth contributions."
Teens, College Grads: Start Your Retirement And Tax Planning Now
Larry Pon, a certified public accountant, says parents can fund a Roth IRA for their teen if the teen is working. That can be funded up to the Roth IRA limit. That's $6,500 for 2023 and $7,000 for 2024 or up to their earned income, whichever is less.
"The teenager's expected tax liability is zero, so there is no after-tax cost to the Roth contribution," he said. "Plus, the Roth IRA will grow completely tax-free."
Recent College Graduates Should Open A Roth IRA
Pon also says most recent college graduates will have income below the Roth IRA AGI limits. For 2024, individuals under 50 can contribute up to $7,000 to their Roth IRA if their Modified Adjusted Gross Income (AGI) falls below $146,000. For those with an AGI between $146,000 and $161,000, a gradual phaseout applies, meaning a reduced contribution is allowed.
"So they – the grads – should fund a Roth IRA until they do not qualify," said Pon.
In many cases, Pon says, these Roth IRAs are funded with gifts from family members. "This will set up these young people for tax-free Roth IRAs upon retirement," he said.
Plus, he notes that first-time homebuyers can withdraw up to $10,000 from their Roth IRA to buy their first home without incurring any taxes or penalties. The Roth IRA must have been open for at least five years. Additionally, there are some other conditions.
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Get Schooled With A 529 Plan
According to Pon, parents might want to open and contribute to a 529 plan for their newborn child. Parents also should encourage friends and relatives to make contributions to the 529 plan.
"This will pay off much better than buying toys for the child," he said. "Many 529 plans provide payment coupons for others to make contributions to the 529 plan."
Grandparents, especially those with large estates, should consider the "super" 529 plan contribution. "They can make five years of annual gift exclusions in one year to a 529 plan," he said. "For 2023, the annual gift exclusion is $17,000, so this means $85,000 can be contributed to a 529 plan with no gift tax consequence."
The 2024 annual gift exclusion is $18,000, so that means the "super" 529 contribution is $90,000.
Super-funding a 529 plan makes sense for those with large estates since the lifetime estate exclusion is expected to drop from $13.61 million in 2024 to $7 million in 2026, according to Pon. You can give away up to the lifetime exclusion amount without incurring any gift or estate taxes.
Time For Giving: Use Charitable Remainder Trusts
Account owners should also consider a Secure Act 2.0 provision that went into effect in 2023, says Brenner. This allows retirement account owners to fund a charitable remainder trust or annuity with a qualified charitable distribution. The maximum amount is $53,000.
"We are seeing lots of charities promoting this with charitable gift annuities," Brenner said. " It allows individuals to make a significant tax-deductible contribution to charity while still receiving income from the assets during their lifetime."
Featherngill, also recommends funding a charitable remainder trust if you have charitable inclinations and are considering an asset sale. "Funding such a trust helps smooth income from the sale. Plus, today's higher interest rates increase the charitable deduction," she said.
Gift Appreciated Securities For Retirement And Tax Planning
Charitable gifts are a good strategy in retirement and tax planning. Keuning said, "Gifting appreciated shares of a security is a great way to benefit a good cause and capture a tax benefit."
To accomplish this tax-savvy move, Keuning says taxpayers need to have stock in a non-qualified/standard brokerage account. "Taxpayers can avoid capital gains tax by gifting appreciated shares of stock, bonds, mutual funds and exchange traded funds held longer than one year," he said. "The charity receives the shares at current market value, and the taxpayer gets a tax deduction at full market value. The gain between the market price and the taxpayer's cost basis is completely avoided."
Read: How To Invest In Magnificent Seven Stocks Like Nvidia In 2024
Work With Employee Stock Purchase Programs
Not all employers provide an employee stock purchase program, or ESPP. But employees who have this option should take advantage of it.
An ESPP is a company-run program that lets employees buy company stock, often at a discount price. Typically, the discount is 15% off the stock price. The initial stock price is based on the price at the beginning or end of the period, whichever is lower. This "look-back" feature means the actual discount can be greater than 15%, says Sean Lovison, founder of Purpose Built Financial Services.
Keuning says the shares are purchased with after-tax dollars withheld from employee paychecks. "If employees meet the holding period requirements, the gain on the stock can be treated as long-term capital gains, which has preferential tax rates," he said. So, to meet the holding period, the stock must be held longer than two years from the grant date and one year from the purchase date.
Keuning says the gain will be taxed as ordinary income if the employee fails to meet this requirement. However, any losses can be deducted as capital losses on their federal tax return.
"ESPPs come with benefits and risks," said Keuning. "The major risk is diversification. Employees have both their income and a portion of their savings tied up in their employer." Consequently, "If the employer falls on hard financial times, they could see a loss of employment and dip in savings due to stock price decline."
The major benefit, alongside the 15% discount, is the long-term capital gains tax treatment, Keuning says.
Diversify Your Portfolio For Retirement And Tax Planning
Diversification remains a cornerstone of retirement planning, says Lovison. Therefore, "a well-balanced portfolio that spreads investments across various asset classes, such as equities, bonds and real estate can help manage risk and optimize returns," he said. "If you're unsure if you are properly diversified, make 2024 the year you figure it out."
Think About Tax Efficiency
If your past tax optimization has only involved using tax-advantaged accounts, take it to the next level in 2024, says Lovison. "Look into strategies like tax-loss harvesting, bunching donations, donor-advised funds and filling up tax brackets," he said.
Tax-loss harvesting sells investments at a loss to offset capital gains and reduce your tax bill. By bunching donations you can exceed the standard deduction and itemize your deductions, potentially reducing your taxable income and tax liability.
(According to the IRS, a donor-advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Filling up tax brackets simply means maximizing your income within each bracket. This allows you to take advantage of the lower tax rates within each bracket before moving onto the next one.)
Also, Featherngill says investors should consider asset location as well as asset allocation. Distributions from pretax retirement plans are taxed as ordinary income, she notes. So focus on fixed-income investments in these accounts and use taxable accounts for tax-favored investments such as stocks.
"Asset location" means choosing the right place to hold your investments. That could be a tax-advantaged account or a regular investment account, to save the most money in taxes.
Review And Adjust Your Portfolio
The best retirement and tax planning strategies include annual portfolio reviews. They are important to ensure your portfolio risk doesn't drift to uncomfortable levels, says Lovison. "Make 2024 the year you pick a date and start rebalancing consistently," he said.
Retirees: Master Dynamic Spending In 2024
For retirees, 2024 is about embracing a dynamic spending strategy, Lovison says.
"Adjusting withdrawal rates in response to market performance and personal financial needs is crucial." Retirees need to strike a balance between enjoying today and securing financial stability for the future, he says. Because of inflation, "it's more important than ever to make sure you are still in balance."
Follow The Retirement And Tax Planning Rules
As an example of the importance of knowing the rules, Brenner mentioned a recent Tax Court case involving the estate of actor James Caan. Caan, whose roles included playing Sonny Corleone in " The Godfather," died in 2022.
According to Brenner, Caan's advisers got into trouble by violating the rule that says when a distribution of property is taken from an IRA, the same property must be rolled over. Caan, and ultimately his estate, ended up owing around $780,000 in unpaid taxes. Plus, he was hit with a $155,000 "accuracy-related penalty" for understating taxes.
So, Brenner said, "It's a good reminder that some things never change." Rollover rules are important. Mistakes are costly.
"For 2024, there may be new opportunities, but the old rules still matter," she said.
