Important financial planning updates for 2024

Each year brings legislative and regulatory changes to important financial planning details, like retirement account contribution limits, tax brackets, income phase-outs for Roth IRAs, estate taxes, and more. 

One of the primary drivers behind these changes is inflation. It’s important to stay up-to-date so you can optimize your savings and investing plan and ensure it’s aligned with the current legislative landscape.

Continue reading for a roundup of the most noteworthy changes and their potential impact on you.

2024 retirement account contribution limits

To encourage more people to save for retirement, the U.S. government allows for specific tax benefits associated with retirement savings accounts. But because of those tax benefits, the government also imposes annual contribution limits for those accounts.

Each year, those limits are subject to change. That’s the case again in 2024. Here’s a summary of some of those changes.

• Contribution limits for employer-sponsored retirement plans, like 401(k), 403(b) and 457 plans increased to $23,000 (from $22,500) for people under age 50 and $30,500 for people who are 50 years and older.
• The total contribution limit for 401(k) accounts is $69,000 for people under age 50 and $76,500 for people who are 50 years and older. This includes both pre-tax and after-tax contributions by the employee and employer.
• Contribution limits for SIMPLE IRA accounts increased to $16,000 (from $15,500) for people under age 50 and $19,500 for people who are 50 years and older.
• Contribution limits for IRAs and Roth IRAs increased to $7,000 (from $6,500) for people under age 50 and $8,000 for people who are 50 years and older.
• Contribution limits for Health Savings Accounts (HSAs) — which is not technically a retirement account but comes with triple-tax advantages and can be used strategically for retirement savings — increased to $4,150 for individuals and $8,300 for families. People who are 55 years and older can contribute an additional $1,000 (for both individuals and families).

Key takeaways

• Double-check your recurring retirement account and HSA contributions. If you’re planning to maximize your contributions to these accounts, you’ll likely need to make some adjustments to your contribution amounts so you reach the increased limits. 
• If your compensation has changed and your retirement account contributions are based on a percentage of your earnings, then you may need to take a closer look and do some fine-tuning to ensure you reach your planned savings targets without exceeding the contribution limits.
• If you’re turning 50 at any time in 2024, you can max out the “catch-up” contributions. You don’t have to prorate the limit or wait until your birthday to start making those contributions.

Income phase-outs for Roth IRA contributions

Roth IRA contributions are different from pre-tax 401(k) and traditional IRA contributions because they grow tax-free. That means you pay tax on the money now but you won’t have to pay tax on any of the growth when you distribute funds from the Roth IRA in retirement.

Because this is such a massive tax benefit, the contribution limits for Roth IRAs are lower than employer-sponsored accounts and the government imposes income phase-outs, restricting who can make direct contributions to a Roth IRA.

To account for inflation, the income limits increased in 2024 for Roth IRA contributions. The Modified Adjusted Gross Income phaseouts are:

• $161,000 for single tax filers; and 
• $240,000 for married joint tax filers

This is up from $153,000 and $228,000 in 2023.

Key takeaways

• If you think you may be approaching the income limit for Roth IRA contributions, we recommend calculating your Modified Adjusted Gross Income (MAGI). With an increase in compensation, it could be that you’re now beyond the income limit and should stop making contributions to a Roth IRA. 
• On the other hand, if your compensation has not changed significantly since 2023, it could be that, with the increased limit, you were not eligible in 2023 but could be in 2024. In that case, and if you’re able, we recommend considering contributions to your Roth IRA for tax-free growth opportunities.
• If your income is higher than the income limit for direct Roth IRA contributions, but you’re still interested in earning tax-free growth on your retirement savings, we suggest looking into backdoor Roth IRA contributions. It’s possible for you to do this on your own, but you may also consult a financial advisor or tax professional to help implement this strategy effectively and correctly.

Tax bracket increases

The income limits for federal tax brackets went up this year. Tax brackets are ranges of income that are subject to the same income tax rate. When tax brackets increase but your income remains relatively unchanged, you might fall into a lower tax bracket than you did the year before. 

The tax rates, which range between 10% to 37%, are not changing, but the income brackets assigned to each rate are increasing by roughly 5%.

Here are the marginal tax rates for 2024:

• 37%: Taxable income greater than $609,350 ($731,200 for married couples filing jointly)
• 35%: Taxable income between $243,726 and $609,350 ($487,451 and $731,200 for married couples filing jointly)
• 32%: Taxable income between $191,951 and $243,725 ($383,901 and $487,450 for married couples filing jointly)
• 24%: Taxable income between $100,526 and $191,950 ($201,051 and $383,900  for married couples filing jointly)
• 22%: Taxable income between $47,151 and $100,525 ($94,301 and $201,050 for married couples filing jointly)
• 12%: Taxable income between $11,601 and $47,150 ($23,201 and $94,300 for married couples filing jointly)
• 10%: Taxable income of $11,600 or less ($23,200 for married couples filing jointly)

Because the federal tax rates are progressive, the amount of tax you owe is calculated, in part, by dividing your income into different segments based on the corresponding tax brackets. That means you don’t pay the same tax rate on all your income. The marginal tax rate is the tax rate you paid on your last dollar of taxable income.

So, for example, if you’re a single filer and your taxable income is $50,000, you are in the 22% tax bracket. However, you won’t owe 22% on all your income. Instead, it will be segmented according to the brackets above:

• The first $11,600 in income will be taxed at 10%
• The next $35,550 will be taxed at 12%
• The final $2,850 will be taxed at 22%

Of course, this does not take into account other tax considerations which could affect your tax bill, such as tax credits and tax deductions.

Key takeaways

• Review the updated tax brackets. Based on your expected income, you may need to evaluate and adjust your tax withholdings to make sure you aren’t withholding too much — or too little —from your paycheck.
• Because increased income limits for tax brackets also affect capital gains taxes, the higher thresholds could present an opportunity for you to sell appreciated securities without any long-term capital gains taxes. For 2024, single filers with taxable income less than $47,025 (or less than $94,050 for married couples filing jointly) fall into the 0% long-term capital gains tax rate.
• With higher tax bracket thresholds, you may consider converting some of your traditional IRA and 401(k) account balances to Roth. The amount you convert will be counted as ordinary income, so with higher thresholds, you may have greater opportunities to implement Roth conversions without inching into a higher tax bracket.

SECURE Act 2.0

The SECURE Act 2.0 was signed into law at the end of 2022, which means some of the legislative impacts are only starting to take effect in 2024. In fact, some provisions of the law won’t even kick in until 2025 or 2026 (like mandatory Roth catch-up contributions for those over the age of 55).

Some of the most significant aspects of the SECURE Act 2.0 taking effect this year involve changes to retirement plans. For example:

• Roth 401(k)s will no longer be subject to required minimum distributions (RMDs).
• SIMPLE IRA accounts can technically feature Roth options (admittedly, we have yet to see this in practice). 
• You are now allowed to take a qualified distribution from your employer-sponsored retirement plan for an immediate and emergent need.
• Employers have the option of making contributions to their employees’ retirement accounts that match the value of an employee’s student loan payments.
• Unused assets in a 529 plan that has been active for 15 years can be rolled over into a Roth IRA (assuming earned income requirements are met). The assets are subject to the annual contribution limits and cannot exceed a lifetime value of $35,000.

Other updates and potential changes on the horizon

Here are some final updates that are already in effect for this year, plus other things to keep an eye on as the year goes on:

• Social Security received a 3.2% cost-of-living adjustment (COLA), which was less than half of the 2023 COLA — indicating slowing inflation.
• The standard deduction increased by approximately 5.5% to $14,600 for single filers and $29,000 for married couples filing jointly. This is an increase of $750 and $1,500, respectively. The standard deduction is important. If you believe your tax deductions add up to more than the standard deduction, you should consider itemizing your deductions for the lowest tax bill.
• If you’re over age 70.5, charitably inclined, and subject to RMDs, the qualified charitable distribution (QCD) — which helps satisfy your RMD and does not count as taxable income — limit increased to $105,000.
• The estate tax exemption increased to $13.61 million per person.
• The gift tax exclusion increased to $18,000 per person.
• The Fed has hinted it may cut the federal funds rate in 2024. If this happens, you should expect to see decreases in savings account rates, auto loan rates, and mortgage rates. This is something to keep an eye on.

Conclusion

When it comes to laws and regulations, there’s an ever-changing landscape. By staying informed, you can avoid common pitfalls and identify ways to use these changes to your advantage.

In light of the updates we’ve covered here, take some time to revisit and fine-tune your financial plan and leverage any new opportunities. Whether it’s slightly increasing your planned savings or finding ways to reduce your taxes, some minor changes made along the way can lead to big impacts over time.

Connect with a Financial Advisor in Athens, GA

If you’re confused, uncertain, or overwhelmed by ever-changing tax and financial laws, the good news is you don’t have to navigate them alone. We’re here to help. We stay up-to-date on all important legislative and regulatory updates and proactively take action for our clients, so they never have to worry about this year’s (or any future) changes. If you’re interested in learning more, please reach out to us today.