Don't Mess With Taxes

Substitute a cat for the dog, and that's pretty much how the hubby and I envision retirement! (Photo: Unsplash+ in collaboration with Getty Images)

OK, boomer. When that catchphrase meme went viral a few years ago, it marked the end of friendly generational relations.

It also could be seen as a wake-up call to retirement savers.

With Social Security already facing financial challenges, many point to the added challenges that Uncle Sam's retirement program faces as even more of the Baby Boom generation retires.

Congress has yet to address Social Security's future. Of course, the House and Senate seem to like to wait until the last minute. But even when Capitol Hill finally acts, the reality is that it still will fall to most of us to take care of our retirement needs ourselves.

When inflation helps: The one bit of good retirement news from Washington, D.C., is that the Internal Revenue Code provides several tax-favored ways for us to save. I mentioned a couple of these options in this year's November tax moves post.

And as also noted in that post, the Internal Revenue Service issued its annual cost-of-living (COLA) adjustments that, in most cases, boost the amounts you can put into tax-favored retirement accounts.

Here's a closer look at how much the IRS says you can stash in 2024 in tax-deferred — or tax-free — retirement accounts and pension plans.

Bump for IRA contributions: Individual retirement arrangements — and yes, the official name is arrangements, not accounts, but the popular IRA acronym works either way (and don't get me started on the usurping Inflation Reduction Act…) — are a great way to save for post-work years.

You can contribute to a traditional IRA with pre-tax dollars and, depending on your income, marital status, and retirement options at work, possibly claim a deduction for at least some of the amount you're saving.

Or you can put already-taxed money into a Roth IRA and not have to worry about taxes on that retirement account ever again.

When it comes to either a traditional IRA or Roth version, the COLA tweaks mean that the maximum annual contribution to such plans will increase in 2024 to $7,000. That's $500 more than the 2023 limit of $6,500.

And while the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 enacted at the end of 2022 provided for a COLA adjustment to the $1,000 IRA catch‑up contribution limit that originally was set by statute, the current numbers didn't move that amount. It remains $1,000 for 2024.

More earnings for IRA maneuverability: The IRS' calculations also increase the 2024 income ranges that determine whether you can make deductible contributions to a traditional IRA, contribute at all to a Roth IRA, and/or claim the Saver's Credit.

Traditional IRAs are still popular because if you or your spouse don't have retirement plans at work, you can deduct your full IRA contribution.

If, however, either spouse is covered by a workplace retirement plan, the deductible amount of a traditional IRA contribution is phased out or totally eliminated depending on your filing status and income.

The table below shows how much more you can make in 2024 before you hit the level where your traditional IRA contributions are reduced or are no longer deductible. The table shows 2023 amounts, too, for two reasons.

First, it gives you an idea of the change. Second, you still have time to contribute to, and max out, your 2023 IRA contribution.

More room for Roth contributions: Roth IRA contributions are not tax deductible when you make them, but withdrawals when you retire are not taxed.

However, there are some income limits on who can contribute to these tax-free retirement savings vehicles. The good news for next year's contributions is that this phase out range increases for single filers by $8,000 and by $12,000 for married filing jointly taxpayers.

For 2024, the amount you can put into a Roth is reduced if your earnings are within the income range for your filing status in the following table. As in the prior table, the 2023 amounts are included for comparison and tax planning for the rest of this year.

Again, note the top dollar amounts. Once your income exceeds the maximum amount for your filing status, you cannot contribute to a Roth IRA.

You can, however, contribute to a traditional IRA and then convert that account to a Roth IRA.

Just like a traditional IRA, the phase-out range for a married individual making Roth contributions while filing a separate tax return is not subject to an annual COLA and stays at $0 to $10,000.

Workplace plan changes, too: In addition to IRAs, some folks are able to stash retirement money in workplace defined contribution accounts, typically known in the private sector as 401(k) plans.

While they're technically not a part of the annual benefits enrollment season underway at some companies right now, the just-announced 2024 tax year changes to 401(k) plans gives you the chance to include these contributions in your overall analysis of your workplace perks.

The tax code monikers for company-provided retirement plans are slightly different for folks employed by other groups. They're known as 403(b) for some nonprofits and teachers, 457 plans for certain government employees and Uncle Sam's Thrift Savings Plan (TSP) for civil service employees and retirees, as well as for members of the uniformed services. But all are affected but the same COLA changes tend to apply.

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the TSP goes up in in 2024 to $23,000. That's a $500 bump up from the 2023 contribution cap of $22,500.

The workplace plan catch-up contribution limit in 2024 for employees aged 50 or older and who participate in these plans will stay at the 2023 amount of $7,500.

And if you're lucky enough to work for a place that has an old-school defined benefit plan — this is where your boss takes total care of your retirement fund — there's a hike here, too. The limitation on the annual benefit of this retirement plan goes from $265,000 in 2023 to $275,000 next year.

Self-employed plan bumps: When you're the boss at your own company, in addition to concentrating on turning a profit, you need to think about the day when you decided to relinquish control.

SEP-IRAs (or, from the glossary, Simplified Employee Pension) and Solo 401(k) plans are popular retirement vehicles for the self-employed small business owners.

The maximum amount that can be put into either of these plans as an employer is determined by a percentage of salary. Once those calculations are completed (thank goodness for tax pros and/or tax software!), the maximum in 2024 will be $69,000. That's a $3,000 increase from 2023's $66,000.

The amount of earnings used to figure your SEP or SoloK contribution also goes up next year. The compensation of $330,000 in 2023 goes to $345,000 in 2024.

If you have a SIMPLE, or savings incentive match plan for employees (final, I swear, glossary plug), the limit on SIMPLE plans for 2024 goes up nominally to $16,000 from the 2023 limit of $15,500. The SIMPLE catch-up limit for individuals aged 50 or older in 2024 remains at the 2023 level of $3,500.

Added credit for saving: A tax code bonus for taking charge of your retirement, the Saver's Credit, also potentially is affected each year by inflation. This tax benefit, officially titled the Retirement Savings Contributions Credit, rewards low- and moderate-income individuals for adding to their nest eggs.

This credit, which is a dollar-for-dollar reduction in any tax you owe, is $1,000.

You can claim the Saver's Credit based on the money you put into IRAs and workplace plans, either where you are an employee or are self-employed. But it is not available if you make more than the earnings limit for your filing status.

In 2024, the Saver's Credit maximum earnings caps go to:

• $38,250 for singles and married filing separately taxpayers, up from $36,500 in 2023;
• $57,375 for heads of household, up from $54,750 this year; and
• $76,500 for married couples filing jointly, up from the 2023 limit of $73,000.

Here's the full table and percentages, based on your adjusted gross income (AGI) for the 2024 Retirement Saver's Credit:

And if you're looking to claim the Saver's Credit on your 2023 tax return, you can do so if your income this year falls within the following income ranges:

Donating retirement money: Some people have planned so well for retirement that they can take their time spending the money. Uncle Sam has some bad news for them. If your retirement funds are in tax-deferred accounts, the Internal Revenue Code requires you to eventually start taking distributions and paying tax on the withdrawals.

These amounts, known as required minimum distributions or RMDs, start at age 72 or age 73, depending on whether you're affected by the SECURE (Setting Every Community Up for Retirement Enhancement) Act 1.0 of 2019 or its 2.0 version enacted at the end of 2022.

The exact amount is calculated each year after you hit your RMD starting age by using one of the IRS' life expectancy tables. They are found in Appendix B of IRS Publication 590-B. These tables are created for various lifestyle situations, but most people use the Uniform Lifetime Table, which the IRS updated in 2020. You also can use AARP's online RMD calculator to determine the amount you must withdraw.

Withdrawals from tax-deferred retirement accounts are taxed at ordinary tax rates, which now top out at 37 percent. Depending on how much you've saved, an RMD could be in the tens of thousands. Such a hefty chunk of change could bump you into a higher tax bracket, as well as increase your Medicare costs.

There is some relief here if your RMD-mandated account is a traditional IRA and you don't need the required withdrawal to cover living expenses. You can use the money to make a qualified charitable distribution (QCD).

Here you roll your RMD directly from your IRA to an IRS-qualified charity. The amount meets your RMD for the year, but that amount is excluded from your taxable income.

The base maximum QCD amount you can exclude from your gross income was set at $100,000. But it's also subject to a potential annual inflation increase. The QCD amount goes from this year's $100,000 to $105,000 in 2024.

But wait, there's more to come: I know some hardcore tax and retirement savings geeks will want even more. Y'all can find that in IRS Notice 2023-75, with all the 2024 COLA changes and Internal Revenue Code retirement plan sections to which they apply.

If, however, you're on the other end of the info spectrum and are feeling overwhelmed by all the retirement plan COLA numbers in this post, I sort of apologize. The sort of disclaimer is because the figures are critical to making the most out of the tax breaks for our nest eggs.

And since COLA tweaks are based on average annual inflation rates, the IRS' annual retirement plan adjustments are included as part of the ol' blog's annual 10-part tax-related inflation series. The IRS tends to issue the retirement numbers first each fall, but for my inflation series purposes, this post falls in the Part 3 slot, as noted in the box below.

The biggies, notably the 2024 income tax brackets and standard deduction amounts, take the top two spots. The IRS should issue those adjustments soon. So keep checking.

As long-time readers know, the anticipated inflation adjustment information dump is huge, so I like to parcel it out via the series. When all is said and done, all the 2024 tax year inflation posts, ranging from today's retirement savings to the anticipated tax brackets and standard deduction amounts to much, much more, will fill out the 1-through-10 series spots.

Thanks for reading this out-of-order inflation series post. And thanks especially for your tax inflation interest and patience regarding the tax inflation series posts still to come!

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