At the end of 2022, the SECURE Act 2.0, short for Setting Every Community Up for Retirement Enhancement, became law. It expands earlier legislation, changing many aspects of the savings and retirement landscape for Americans. The rule changes make various accounts more beneficial or flexible, so it’s important to stay up-to-date and understand how the updated regulations affect your current and future financial life.
In this article, I will review ten changes to various tax-advantaged accounts starting in 2024. So, if you want to pay less tax and save more for a secure future, read on to learn more.
In this article, I will review ten changes to various tax-advantaged accounts starting in 2024. So, if you want to pay less tax and save more for a secure future, read on to learn more.
2. Flexible spending account (FSA) contribution limits increase.
An FSA is another type of medical spending account that allows pre-tax contributions; however, unlike an HSA, it’s only offered by employers. You can defer a portion of your paycheck to an FSA and use it to pay qualified healthcare and childcare expenses.
Unlike an HSA, which has no spending deadline, FSA funds must typically be spent by the end of the plan year, known as the “use-it-or-lose-it” provision. For 2023, FSA contribution limits are $3,050, and increase to $3,200 in 2024.
3. Workplace retirement account contribution limits increase.
Most workplace retirement plans—including 401(k)s, 403(b)s, 457s, and solo 401(k)s (for the self-employed)—allow employees to contribute up to $22,500 in 2023. Based on cost of living adjustments, the limit is expected to increase by $500 to $23,000 in 2024.
The official IRS announcement for the following year’s contribution limits is usually released in mid-October, so the $500 bump is an educated guess from experts about the cost of living adjustment.
The catch-up contribution limit for those over 50 remains at $7,500 for 2024, giving you a total limit of $30,500 next year. The limitations apply to both pre-tax, traditional retirement plans and after-tax, Roth accounts.
If your company also contributes matching or profit-sharing funds, you and your employer’s total contributions increase from $66,000 in 2023 to $68,000 in 2024. If you’re over 50, your total contribution limit, including catch-ups, will be $75,500 ($68,000 plus $7,500).
Note that 457 plans have unique catch-up rules, so confirm the total with your plan administrator if you have one. Also, if you have a SIMPLE retirement plan, the contribution limits are different: $15,500 for 2023, increasing to $16,000 in 2024.
4. Individual retirement account (IRA) contribution limits increase.
Anyone with earned income, no matter your age, qualifies for a traditional or Roth IRA. However, there are Roth IRA income limits, and I’ll review what’s changing about them in a moment.
IRA contribution limits are also expected to increase by $500 from $6,500 in 2023 to $7,000 in 2024. If you’re over 50, you qualify for an additional $1,000 catch-up, giving you a total contribution of $8,000 in 2024.
The Roth IRA income cutoff will increase next year as follows, allowing more people to qualify for this terrific account:
- Single taxpayers with modified adjusted gross income (MAGI) above $153,000 in 2023 can’t participate in a Roth IRA. For 2024, the threshold gets raised to MAGI over $161,000.
- Married taxpayers filing jointly with MAGI above $228,000 cannot contribute to a Roth IRA in 2023. That increases to $240,000 in 2024.
RELATED: Think You’re Too Rich for a Roth IRA? Think Again
5. IRA catch-up contributions adjust for inflation.
I mentioned that the IRA catch-up contribution for those over 50 is $1,000 for 2023 and 2024. However, starting in 2024, they will begin to get adjusted to keep up with inflation. That means catch-up limits will likely increase slightly each year starting in 2025.
6. SEP-IRA contribution limits increase.
A SEP-IRA, or Simplified Employee Pension IRA, is a retirement plan for business owners, their employees, and the self-employed. Contributions can only come from an employer; employees can never contribute their own funds.
For 2023, contributions are limited to the lesser of 25% of compensation or $66,000. But the limit increases to the lesser of 25% of compensation or $68,000 per year for 2024.
7. Workplace Roths have no required minimum distributions (RMDs).
Before SECURE 2.0, a Roth IRA was the only retirement account that allowed you to skip RMDs. Even workers with a Roth 401(k) or 403(b) had to start RMDs at age 72—unless they rolled over funds to a Roth IRA.
But starting in 2024, you won’t be subject to mandatory distributions if you have money in a workplace Roth. Also, the new legislation increased the age for traditional retirement account RMDs from 72 to 73. And in 2033, the RMD age jumps to 75.
8. Roth IRAs can receive penalty-free rollovers from 529 plans.
Another significant change related to Roths affects anyone with a 529 college savings plan. These tax-advantaged investment accounts are designed to help families save for future education expenses.
With a 529, you contribute and invest funds using a menu of choices, such as mutual funds, that grow tax-deferred. Then, you can pay qualified expenses, like tuition, supplies, and room and board at eligible colleges and universities, tax-free. Plus, you can use $10,000 per year per child for primary and secondary school education without paying taxes or penalties.
One problem with 529s is not knowing exactly how much you might need to save for future education expenses. If you save too much and take non-qualified withdrawals, the earnings portion of the account gets subject to taxes plus a steep 20% penalty.
Starting in 2024, you can roll over up to $35,000 to a beneficiary’s (the student’s) Roth IRA over their lifetime with no taxes or penalties. Note that you still must adhere to the annual IRA contribution limit, which equals the beneficiary’s annual earned income for up to $7,000 for 2024.
Note that you can only do a 529 to Roth IRA rollover if the 529 has been open for at least 15 years. Also, contributions and earnings made within the previous five years are not eligible for a rollover. If you’re ready to open a 529 or have questions about the options, Pelican is an excellent place to start.
ALSO READ: 10 IRA Facts Everyone Should Know
9. Workplace Roths can be tapped for emergencies.
In 2024, workplace retirement plans can offer a linked “emergency savings account” for non-highly paid employees. You can save up to $2,500 (or a smaller amount established by an employer) to a Roth and make several penalty-free annual distributions. And your emergency savings contributions may be eligible for an employer match, depending on your plan’s rules.
10. Roth catch-up requirements got delayed.
The SECURE Act also significantly changes catch-up contributions for retirement plan participants over 50. The rule says that workers with MAGI over $145,000 in the prior year can only put catch-up contributions in a Roth (with some exceptions).
However, there was a lot of pushback from industry groups and employers who said they couldn’t update their payroll systems in time to facilitate this change by 2024. So, the IRS delayed the ‘Rothification’ of catch-ups until 2026.
That means for 2023, 2024, and 2025, those over 50 can make traditional or Roth catch-up contributions. After 2026, if you earn $145,000 or less, you’re exempt from the Roth catch-up requirement but must follow it when your income is higher.
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