New IRS rules have changed the contribution limits and income limits to several retirement programs, providing greater potential tax breaks and savings opportunities for U.S. taxpayers.
Employer-contribution programs such as 401(k), 403(b) plans, 457 plan, and Thrift Savings Plan along with Roth and traditional IRAs are all impacted by the IRS rule changes.
Employment Contributions Increases
The IRS has increased contribution limits to several employee programs. The 401(k) contribution is being raised to $23,000 — a $500 increase from the current $22,500. These contribution increases are also available for taxpayers possessing a 403(b), 457 and the federal government’s Thrift Savings Plan.
Taxpayers who are 50 years of age or older will be able to save an additional $7,500 in “catch-up contributions” totaling $30,500.
Traditionally, tax-deferred plans such as 401(k), 403(b) plan, 457 plan and the federal government’s Thrift Savings Plan allow employees to save a portion of their income to a retirement plan. The money added to these accounts is not taxable in the year contributions are made. The contributions are then invested in various ways for retirement. When an employee retires, their withdrawals are subject to income taxes.
One of the only exceptions to this rule is the Roth 401(k). If you choose to participate in this type of retirement program through your workplace savings plan, the money is not tax-deferred and is subject to income tax, according to CNN. However, you can withdraw on your retirement without having to pay taxes on the contributions.
ROTH IRA and Traditional IRA Changes
An individual retirement account allows you the opportunity to participate in a variety of investments such as stocks, bonds, EFTs, mutual funds and real estate.
For 2024, contributions for a traditional IRA and Roth IRA have increased to $7,000. And for people 50 and older, an additional $1,000 is allowed.
Taxpayers contributing to a traditional IRA do not pay income taxes on their contributions when they are initially made. However, any withdrawals from a traditional IRA are considered taxable income.
Conversely, the Roth IRA is liable for income tax in the year contributions are contributed, but withdrawals from a Roth IRA in retirement or for a home purchase are exceptions.
While the contribution increase for IRAs is enticing to taxpayers, there are some strict rules on who can receive the tax break. For instance, if a taxpayer or their spouse has a workplace retirement plan, their tax deduction can be reduced or phased out. The stipulations are based on filing status and income.
Here are the phase-out ranges for 2024:
- For single taxpayers with an employee-based retirement plan and a traditional IRA, the phase-out range is between $77,000 and $87,000, an increase from last year’s $73,000 to $83,000. For those with a Roth IRA, it is $146,000 and $161,000.
- Married couples filing jointly with at least one spouse making an IRA contribution between $123,000 and $143,000. In contrast, for those with a Roth IRA, the income range is between $230,000 and $240,000.
- For an IRA contributor not covered by an employee retirement plan but is married to a covered contributor, the increase ranges from $230,000 to $240,000.
- For married couples filing separately, there is no annual cost-of-living adjustment and will stay between $0 and $10,000 for traditional IRA and Roth IRA.
Support For Low-Income Taxpayers Looking For Retirement Savings
Low-income employees are able to decrease their federal income tax liability through the Retirement Savings Contributions Credit. Also known as the Saver’s Credit, this program helps low-income employees to save for retirement.
For 2024, a single taxpayer’s income must be below $38,250, and if filing head of household $57,375. For taxpayers filing jointly, the combined income can be no more than $76,500.