Top Financial Planning and Tax Tips for 2024

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As we ring in 2024 with the New Year, we are focusing on making smart financial planning and tax moves to set you up to optimize your financial success. We have a confluence of multiple federal legislation recently enacted and another potentially sunsetting to deal with in 2024; Not to mention any tax proposal from the upcoming Presidential Election. The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 passed in December of 2022, with new features coming into play in 2024. The Tax Cuts and Job Act of 2017 expires at the end of 2025, which opens up some financial planning opportunities.

Review Your Retirement Accounts Savings

Are you making the maximum contributions to your retirement accounts? For 2024, the new cost of living adjustments from the IRS allows you to contribute $23,000 in your 401(k); an increase from $22,500 in 2023. For individuals 50 and over, the catch-up remains the same as last year at $7,500, for a total plan participant contribution of $30,500. The new amount also applies to 403(b) and 457 plans. The limit on total employer-plus-employee contributions for 2024 is $69,000, a $3,000 increase from last year.

The Traditional 401(k) is one of the most prominent retirement savings vehicles that any for-profit employer sets up through your employment. It is a very convenient way to save for retirement with pre-tax Dollars, which lowers your taxable income for the year while adding a possible bonus company match to your contribution. The company match is free money put toward retirement savings, and this is the first place you should allocate retirement savings Dollars. Some plans may match up to 3 percent of your salary or 50% percent match up to 8 percent of your salary… make sure you take advantage of this company benefit!

Contact the Bedell Frazier Financial Planning team if you would like assistance with your 401(k), 403(b) or 457 plan contributions or the asset allocation of your investment choices. We provide this service for you or your children free as Bedell Frazier clients.

Individual Retirement Accounts (IRA) also see an increased contribution with a $500 bump for a total of $7,000. The 50 and over catch-up remains $1,000 for IRA, unchanged since 2006. With the passage of SECURE Act 2.0 the IRA catch-up will be indexed to inflation going forward. The inflation-adjusted amount multiple must be at least $100 to have an increase. It did not reach the $100 threshold for an increase in 2024.

You must have earned income to contribute to an IRA, and you cannot contribute more than you earn. If you are a non-working spouse, you can contribute to a spousal IRA as long as your spouse earns enough to cover both of your contributions. The IRA contribution limits apply to your combined traditional and Roth IRA. If you don’t have a retirement plan through your employer, like a 401(k), the contributions you make to a traditional IRA may be tax-deductible.

Consider using Roth Strategies

With the expiration of existing tax rates when the Tax Cuts and Jobs Act (TCJA) sunsets at the end of 2025 and the rising federal budget deficit, it appears higher income tax rates are on the horizon. Roth accounts have the great feature of growing tax-free and having distributions come out tax-free in retirement (subject to certain conditions) with no required minimum distributions (RMD) during the account owner’s lifetime. That gives you tremendous flexibility to pull from the Roth account tax-free if you had a major expense in retirement, like a roof replacement. Or you could let the account grow tax-free your entire life and leave it to your heirs, who will be able to take distributions tax-free before the account must be emptied ten years after death. Tax diversification is an important financial planning subject, you don’t just want 401(k) and deductible IRA retirement Dollars that come out of the accounts as ordinary income. You would like a nice balance between tax-deferred retirement accounts, Roth accounts, and taxable accounts.

The 39.6% highest income tax bracket will return, and the lowest bracket will increase from 12% to 15% when the TCJA tax rates expire at the start of 2026 if Congress takes no action. We have a two-year window before a probable tax increase to implement some different Roth strategies to create or grow your Roth accounts.

“I don’t know if I can live on my income or not—the government won’t let me try it.”

Bob Thaves

There are a number of routes you can take to get money into a Roth account. Let’s examine your different Roth options:

Roth IRA Contribution

You can make a Roth IRA contribution the same as a traditional IRA in the amount of $7,000 for 2024, with the $1,000 catch-up for those 50 and over. $7,000 is the combined amount you can contribute between a traditional and Roth IRA. The income thresholds to contribute to a Roth as a single taxpayer or head of household begin to phase out between $138,000 and $153,000, the same as last year. Married filing jointly phase-out was bumped up by $2,000 to between $230,000 and $240,000. You can make a partial Roth contribution if you are between the phase-out range and can make no contribution if your adjusted gross income is over the phase-out.

Roth Conversion

Another way to get Dollars into a Roth account is by doing a Roth Conversion. You take a distribution from your current IRA or 401(k) and roll it into a Roth account. You pay taxes on that distribution in the current tax year while creating a Roth tax-free bucket for the remainder of your life (and if left to your heirs, another 10 years of tax-free growth). The conversion is not limited to $7,000 and income limits don’t apply. You can convert as much as makes sense based on your other taxable income and time horizon. A great time to execute this strategy is when you are in that “income valley” of life; when you are no longer working full time but before you begin to draw on social security and start taking the required minimum distributions from your retirement accounts. We can model this in our financial planning software for you if you are interested in learning more.

Contribute and Convert

If you do not have a Traditional IRA account, you may be able to utilize a strategy called a back door Roth; this allows you to contribute after-tax Dollars to a Traditional IRA (no tax deduction) and then convert those tax-free into a Roth IRA. This strategy has been on the Congressional chopping block for a number of years, from both parties, and this loophole will probably be closed soon.

Roth 401(k)

Roth 401(k) accounts are funded using after-tax Dollars rather than pre-tax Dollars. This is probably the easiest way for most working people to contribute to a Roth account. When you make withdrawals in retirement, they come out of the Roth tax-free rather than as ordinary income with the traditional 401(k). The Roth 401(k) offers the combination of tax-free growth and tax-free withdrawals. Thanks to SECURE Act 2.0, Roth 401(k) will no longer be subject to required minimum distributions beginning this year, bringing them in line with Roth IRAs.

529 College Savings Rollover to Roth IRA

SECURE Act 2.0 allows the beneficiaries (child) of the 529 college savings account to roll leftover college savings into a Roth IRA in their name. The account must have been opened for 15 years and the money in the account for 5 years to qualify for the rollover. The annual contribution limits still apply, $7,000 in 2024, but the normal income limits on Roth IRA contributions do not impact this transfer. The lifetime rollover limit is $35,000 per beneficiary of unused 529 college funds to the Roth IRA.

“The more your money works for you, the less you have to work for money.”

Idowu Koyenikan

Qualified Charitable Distributions (QCD)

With nearly 90% of taxpayers not itemizing their deductions given the higher standard deduction and SALT caps, Qualified Charitable Distributions or QCD from an IRA are a great place to donate for those charitably inclined. Plus, it is a real tax saver! People over the age of 70.5 can contribute directly from their IRA to a 501(c)3 charity and the money comes out of the account tax-free that would otherwise be taxed as ordinary income. The money must pass directly from your IRA custodian to the charity. There is no tax deduction for this charitable donation since you are receiving the benefit of tax-free withdrawal from your IRA. Since the money comes out of the account tax-free, it doesn’t add to your adjusted gross income, which is used by Medicare to determine the cost of your monthly premiums.

QCDs can go toward satisfying your required minimum distribution for the year if taken first. The following types of IRAs are available for QCDs to be taken from: Traditional, Rollover, Inherited, SEP(inactive), and SIMPLE(inactive). With the SECURE Act 2.0 passage, QCD amounts are now indexed to inflation, increasing $5,000 in 2024 up to $105,000 per individual. We can model QCDs in our financial planning software if you want to give a set Dollar amount per year, or we can examine how your financial plan will be impacted by giving 50%, 75%, or even 100% of your required minimum distribution to qualified charities.

New 401(k) Features in 2024

Several new provisions from SECURE Act 2.0 that impact retirement plans go into effect this year. Workers early in their careers these days have a difficult decision to make; save for retirement or pay down their student debt. Companies will now be allowed to make matching contributions for their employees who are paying down student loans. The employee makes payments toward their student loans and the company match goes into the 401(k), 403b, or Simple IRA. Best of both worlds for those tackling their student debt.

Another new option in 2024 is employers are now allowed to include emergency savings accounts within workplace retirement plans like a 401(k). These PLESA accounts, Pension-Linked Emergency Savings Accounts, are employee after-tax Roth contributions that must be put towards investments that offer principal protection to a maximum balance of $2,500. This should not replace your emergency fund, where you want at least three to six months of non-discretionary expenses set aside to be prepared for unforeseen circumstances that may arise.

Beginning this year employees can make one withdrawal per year from their 401(k) or IRA of $1,000 to cover personal and family emergency expenses without paying the 10% penalty for withdraws before age 59.5. You will have to pay taxes on the withdrawal. You will need to self-certify that the money is for an emergency. If you choose not to repay the distribution within a certain time, you won’t be allowed another emergency distribution for three years. Victims of domestic abuse can withdraw up to $10,000 from IRA or 401(k) without paying the 10% penalty.

The SECURE Act 2.0 feature, where the 50 and over catch-up had to be Roth contributions based on an individual’s income slated for 2024, has been tabled by the IRS until 2026.

Gifting Limits Increase in the New Year

The annual gift tax exclusion increases by $1,000 in 2024 and will stand at $18,000 per donee. Married couples can give away $36,000 per donee with gift splitting. You will need to file IRS form 709 for any gift splitting.

Contributions Increase for Self-Employed Retirement Accounts in 2024

SEP (Simplified Employee Pension) IRA increases from a maximum of $65,000 to $69,000 in 2024. SIMPLE (Savings Incentive Match Plan for Employees) IRA is $16,000 with 50 and over catch-up increase of $3,500 for a total maximum of $19,500.

Update Your Financial Plan with Bedell Frazier

With inflation running hot the past few years, it has caused many to reevaluate their retirement spending plans. Can you still afford the retirement you were planning? Do you have to work longer to reach your retirement goals? Can you take that special vacation? Can you gift your kids/grandkids money to buy a home? Do you have retirement planning questions? We can answer these, plus many more! Now would be the time to take advantage of our complimentary financial planning as a Bedell Frazier client. If you already have a financial plan, we would love to revisit it with you.

The Bedell Frazier Financial Planning Department wishes you a healthy and prosperous 2024!

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