Tag: traditional ira

Andrew Steffensmeier

Specializes in small business preparation and planning, investment advisory services, business tax planning services

Many IRA and retirement plan limits are indexed for inflation each year. Several of these key numbers have increased once again for 2024.

How much can you save in an IRA?

The maximum amount you can contribute to a traditional IRA or a Roth IRA in 2024 will be $7,000 (or 100% of your earned income, if less), up from $6,500 in 2023. The maximum catch-up contribution for those age 50 or older remains $1,000. You can contribute to both a traditional IRA and a Roth IRA in 2024, but your total contributions cannot exceed these annual limits.

Can you deduct your traditional IRA contributions?

If you (or if you’re married, both you and your spouse) are not covered by a work-based retirement plan, your contributions to a traditional IRA are generally fully tax deductible.

If you’re married, filing jointly, and you’re not covered by an employer plan but your spouse is, you may generally claim a full deduction if your modified adjusted gross income (MAGI) is $230,000 or less (up from $218,000 or less in 2023). Your deduction is limited if your MAGI is between $230,000 and $240,000 (up from $218,000 and $228,000 in 2023) and eliminated if your MAGI is $240,000 or more (up from $228,000 in 2023).

For those who are covered by an employer plan, deductibility depends on income and filing status. If your filing status is single or head of household, you can fully deduct your IRA contribution in 2024 if your MAGI is $77,000 or less (up from $73,000 in 2023). If you’re married and filing a joint return, you can fully deduct your contribution if your MAGI is $123,000 or less (up from $116,000 in 2023). For taxpayers earning more than these thresholds, the following phaseout limits apply.

If your 2024 federal income tax filing status is:	Your IRA deduction is limited if your MAGI is between:	Your deduction is eliminated if your MAGI is:
Single or head of household	$77,000 and $87,000	$87,000 or more
Married filing jointly or qualifying widow(er)	$123,000 and $143,000 (combined)	$143,000 or more (combined)
Married filing separately	$0 and $10,000	$10,000 or more

Can you contribute to a Roth IRA?

The income limits for determining whether you can contribute to a Roth IRA will also increase in 2024. If your filing status is single or head of household, you can contribute the full $7,000 ($8,000 if you are age 50 or older) to a Roth IRA if your MAGI is $146,000 or less (up from $138,000 in 2023). And if you’re married and filing a joint return, you can make a full contribution if your MAGI is $230,000 or less (up from $218,000 in 2023). For taxpayers earning more than these thresholds, the following phaseout limits apply.

If your 2024 federal income tax filing status is:	Your Roth IRA contribution is limited if your MAGI is between:	You cannot contribute to a Roth IRA if your MAGI is:
Single or head of household	$146,000 and $161,000	$161,000 or more
Married filing jointly or qualifying widow(er)	$230,000 and $240,000 (combined)	$240,000 or more (combined)
Married filing separately	More than $0 but less than $10,000	$10,000 or more

How much can you save in a work-based plan?

If you participate in an employer-sponsored retirement plan, you may be pleased to learn that you can save even more in 2024. The maximum amount you can contribute (your “elective deferrals”) to a 401(k) plan will increase to $23,000 in 2024 (up from $22,500 in 2023). This limit also applies to 403(b) and 457(b) plans, as well as the Federal Thrift Savings Plan. If you’re age 50 or older, you can also make catch-up contributions of up to $7,500 to these plans in 2024 (unchanged from 2023). [Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.]

The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) will increase to $16,000 in 2024 (up from $15,500 in 2023), and the catch-up limit for those age 50 or older remains $3,500. (Note that in 2024, new rules take effect that permit certain small employers to allow additional contributions.)

Plan type:	2024 deferral limit:	Catch-up limit:
401(k), 403(b), governmental 457(b), Federal Thrift Savings Plan	$23,000	$7,500
SIMPLE plans	$16,000	$3,500

Note: Contributions can’t exceed 100% of your income.

If you participate in more than one retirement plan, your total elective deferrals can’t exceed the annual limit ($23,000 in 2024 plus any applicable catch-up contributions). Deferrals to 401(k) plans, 403(b) plans, and SIMPLE plans are included in this aggregate limit, but deferrals to Section 457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can save the full amount in each plan — a total of $46,000 in 2024 (plus any catch-up contributions).

The maximum amount that can be allocated to your account in a defined contribution plan [for example, a 401(k) plan or profit-sharing plan] in 2024 is $69,000 (up from $66,000 in 2023) plus age 50 or older catch-up contributions. This includes both your contributions and your employer’s contributions. Special rules apply if your employer sponsors more than one retirement plan.

Finally, the maximum amount of compensation that can be taken into account in determining benefits for most plans in 2024 is $345,000 (up from $330,000 in 2023), and the dollar threshold for determining highly compensated employees (when 2024 is the look-back year) increases to $155,000 (up from $150,000 when 2023 is the look-back year).

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

This communication is strictly intended for individuals residing in the state(s) of NE. No offers may be made or accepted from any resident outside the specific states referenced.

Clint Weeder

Specializes in business tax planning, investment advisory services, business valuations

One silver lining in the current bear market is that this could be a good time to convert assets from a traditional IRA to a Roth IRA. Converted assets are subject to federal income tax in the year of conversion, which might be a substantial tax bill. However, if assets in your traditional IRA have lost value, you will pay taxes on a lower asset base when you convert. If all conditions are met, the Roth account will incur no further income tax liability for you or your designated beneficiaries, no matter how much growth the account experiences.

Tax Trade-Off

The logic behind deferring taxes on retirement savings is that you may be in a lower tax bracket when you retire, so a current tax deduction might be more appealing than tax-free income in retirement. However, lower rates set by the Tax Cuts and Jobs Act (set to expire after 2025) may have changed that calculation for you. A cost-benefit analysis could help determine whether it would be beneficial to pay taxes on some of your IRA assets now rather than later. One strategy is to “fill your tax bracket,” meaning you would convert an asset value that would keep you in the same tax bracket. This requires projecting your income for 2022.

Lower Values, More Shares

As long as your traditional and Roth IRAs are with the same provider, you can typically transfer shares from one account to the other. Thus, when share prices are lower, you could theoretically convert more shares for each taxable dollar and would have more shares in your Roth account to pursue tax-free growth. Of course, there is also a risk that the converted assets will go down in value. You may have the option to take taxes directly out of your converted assets, but this is generally not wise.

Two Time Tests

Roth accounts are subject to two different five-year holding requirements: one related to withdrawals of earnings and the other related to conversions. For a tax-free and penalty-free withdrawal of earnings, including earnings on converted amounts, a Roth account must meet a five-year holding period beginning January 1 of the year your first Roth account was opened, and the withdrawal must take place after age 59½ or meet an IRS exception. If you have had a Roth IRA for some time, this may not be an issue, but it could come into play if you open your first Roth IRA for the conversion.

Assets converted to a Roth IRA can be withdrawn free of ordinary income tax at any time, because you paid taxes at the time of the conversion. However, a 10% penalty may apply if you withdraw the assets before the end of a different five-year period, which begins January 1 of the year of each conversion, unless you are age 59½ or another exception applies.

More Favorable RMD Rules

Unlike a traditional IRA, Roth IRAs are not subject to required minimum distribution (RMD) rules during the lifetime of the original owner. Spouse beneficiaries who treat a Roth IRA as their own are also not subject to RMDs during their lifetimes. Other beneficiaries inheriting a Roth IRA are subject to the RMD rules. In any case, Roth distributions would be tax-free. The longer your investments can pursue growth, the more advantageous it may be for you and your beneficiaries to have tax-free income.

All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.