01.30.2024
Retirement account rules and contribution limits get adjusted in the new year.
By Kerry Hannon-Senior Columnist
Date: Decemeber 27th, 2023
Saving for retirement is getting a little easier in 2024 thanks to the phase-in of a handful of provisions stemming from the Secure 2.0 Act, which became law at the end of last year.
Here’s a roundup of some of the key retirement-related changes to watch out for in the new year and planning-related moves to consider.
New retirement saving reforms and rule changes
Employers will be able to consider student loan payments as qualifying contributions toward retirement-matching programs. That means if your employer provides a match to your 401(k) contributions and you are paying down your student loan, you could count your monthly student loan payments as your “contribution” to your employer-provided retirement account, even though your dough isn’t going in there.
Your employer’s match does, however, go into a retirement savings account. Provisions from the retirement law makes it possible for employers to earn a tax break on that type of match. The precise matching formula and whether the employer offers this depends on the employer.
There will be easier emergency access to retirement savings accounts. Ransacking retirement accounts to pay for unexpected financial shocks spiked in 2023 as inflation and interest rates stretched Americans’ budgets. This might help solve that for some folks. Starting in 2024, you may be able to pull up to $1,000 annually from a retirement account for specific emergency needs without owing the 10% early distribution penalty.
And if you agree to pay it back within three years, you might not face a tax bill on the sum either. That’s providing the withdrawal can be tagged to a personal or family emergency.
Domestic abuse victims under age 59½ can now take up to $10,000 from their IRAs or 401(k)s without paying the 10% penalty tax.
Employers also have the green light to offer their employees the option of putting money into an emergency fund that is paired with their retirement plan. Employees would be able to save up to $2,500 in an emergency fund. While this provision goes into effect on Jan. 1, it may take some time to get going.
“I don’t anticipate that getting much traction until a wide variety of administrative issues are worked out between plan sponsors, record keepers, policymakers, and regulators,” Emerson Sprick, senior economic analyst at the Bipartisan Policy Center, told Yahoo Finance.
Another critical measure effective in the new year authorizes “starter 401(k)s.”
“This is a simplified plan that employers can offer if they’re just getting started as a plan sponsor and that they can use off the shelf,” Sprick said. “These plans could really help expand retirement plan coverage in coming years, as they have the potential to drastically reduce administrative burden, especially on smaller employers.
“This question of access is really gaining momentum, as only around half of US workers have access to an employer-sponsored retirement savings plan,” he added.
And if you’re sitting on unused funds in 529 education accounts, take heart. Starting in 2024, you can roll those savings over tax-free to a Roth IRA. There are restrictions, of course. For instance, there’s a $35,000 lifetime cap, and rollover amounts cannot exceed the annual contribution limit for Roth IRAs. So, if you are under 50 and have $35,000 in unused 529 assets, you could roll over $7,000 per year (this contribution limit may change annually) over a five-year period. And the 529 account must have been open for more than 15 years.
Higher saver contribution limits
“The changes that retirees and those preparing for retirement can expect in 2024 are fairly standard,” Sprick said. “Contribution limits for retirement plans increased modestly.”
Workers who have a 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan can contribute up to $23,000 next year, up from the limit of $22,500 this year.
Those of you who are 50 and over can save an additional $7,500 catch-up contribution.
The contribution limit on individual retirement accounts (IRAs) will increase by $500 in 2024, from $6,500 to $7,000.
The IRA catch‑up contribution limit for individuals aged 50 and over was amended under the Secure 2.0 Act of 2022 to include an annual cost‑of‑living adjustment but remains $1,000 for 2024.
For 2024, IRA deductions for singles covered by a retirement plan at work aren’t allowed after their modified adjusted gross income (MAGI) hits $87,000 versus $83,000 in 2023. The deduction disappears for married couples filing jointly when their MAGI hits $136,000, up from $129,000 in 2022.
More people will be able to contribute to Roth IRA accounts too. In 2024, the income limit range will increase to between $146,000 and $161,000 for single individuals and heads of households, up from between $138,000 and $153,000 in 2023. For married couples filing jointly, the range increases to between $230,000 and $240,000.
Finally, the income limit for the Saver’s Credit, a nonrefundable tax credit worth up to $1,000 ($2,000 if married filing jointly) for taxpayers who contribute to a retirement account is $76,500 for married couples filing jointly, up from $73,000; $57,375 for heads of household, up from $54,750; and $38,250 for singles and married individuals filing separately, up from $36,500.
A key retirement tool gets sweeter
How much you can contribute to your health savings account is getting more generous. The new 2024 annual contribution limit announced by the IRS on health savings accounts, or HSAs, for individuals will be $4,150, a $300 uptick from 2023. For family coverage, the HSA contribution limit rises to $8,300, up $550.
“HSA contribution limit increases for 2024 are higher than what we’ve grown accustomed to in recent history because of above-average inflation in 2022 and 2023,” Jake Spiegel, research associate, health and wealth benefits, at the Employee Benefit Research Institute (EBRI), a nonprofit, nonpartisan organization, told Yahoo Finance.
While these accounts are not a substitute for a traditional retirement account, the larger contribution maximum can help boost retirement savings with the vehicle’s triple tax advantage. It’s the only account that lets you put money in on a tax-free basis, lets it build up tax-free, and lets it come out tax-free for qualified healthcare expenses.
A health savings account option is available if you’re enrolled in a high-deductible health care plan (HDHP). You can also open an account as a self-employed freelancer or business owner if you have a qualified HDHP. The IRS sets the parameters for these accounts annually.
“While an HSA is not explicitly a retirement savings vehicle, it’s a smart move to use it in that way, if possible,” Morningstar’s personal finance director Christine Benz, told Yahoo Finance.
“The idea would be to contribute to the HSA, invest the money, and use non-HSA funds to cover healthcare expenses. It’s pretty much a can’t miss from a tax standpoint.”
