10 Key Retirement Planning and 401k Changes in 2024

Retirement planning is an essential aspect of securing your financial well-being, but the ever-changing rules and regulations can make it a challenge.

This year, we’ve seen several significant changes that could impact your retirement savings strategy. Understanding these changes and how they may affect your plans is crucial to helping you make informed decisions.

Today, we’re discussing the top retirement changes for 2024 to help you adapt your retirement planning approach, maximize your savings, and ensure a more comfortable future.

1. Increased Contribution Limits

In 2024, retirement savers can take advantage of increased contribution limits for various retirement accounts. For Roth and traditional IRAs (“Individual Retirement Accounts”), the contribution limit rises to $7,000, up from $6,500 in 2023. This means that individuals can save an additional $500 in their IRAs compared to the previous year.

Those aged 50 or older with an IRA can make catch-up contributions of $1,000, bringing their total IRA contribution limit to $8,000 for the year.

401(k) plans and other employer-sponsored retirement plans, such as 403(b) plans, also see a boost in contribution limits. In 2024, employees can contribute up to $23,000 to their 401(k) or 403(b), an increase from the $22,500 limit in 2023. For employees aged 50 or older, the catch-up contribution limit for these plans remains at $7,500, allowing them to save a total of $30,500 in their employer-sponsored plans.

2. Changes to Required Minimum Distributions (RMDs)

The SECURE 2.0 Act, signed into law in December 2022, changed the way some RMDs work. One notable change was the increase in the age at which retirees must begin taking RMDs from their retirement accounts. In 2023, the RMD age increased to 73, up from 72. This change will hold steady in 2024.

This will change again in 2033 when the RMD age will increase to 75.

Another important change relates to Roth accounts in employer retirement plans. Starting in 2024, Roth accounts will no longer be subject to pre-death RMDs. This means that retirees with Roth accounts in their 401(k) or 403(b) plans will not be required to take minimum distributions during their lifetime. This change aligns the treatment of Roth accounts in employer plans with Roth IRAs, which have always been exempt from pre-death RMDs.

3. 529 Plan Rollovers to Roth IRAs

Under a provision in the SECURE 2.0 Act, beneficiaries of 529 plans can now roll over funds from their 529 accounts into Roth IRAs without incurring taxes or penalties. This rollover is subject to a lifetime limit of $35,000 and can only be performed if the 529 plan has been open for at least 15 years.

To be eligible for this rollover, the beneficiary must have earned income at least equal to the amount being transferred to their Roth IRA. The rollover is also subject to the annual Roth IRA contribution limits. Beneficiaries have the option to spread the rollover across multiple years to maximize their savings potential and avoid exceeding the annual contribution limits for Roth IRAs.

4. Introduction of Starter 401(k) Plans

In 2024, a new type of retirement savings plan will be introduced: the Starter 401(k). These plans are designed to make it easier for small businesses to offer retirement benefits to their employees. Starter 401(k) plans come with lower contribution limits compared to traditional 401(k)s, with an annual limit of $6,000 and a catch-up contribution of $1,000 for those aged 50 or older. This means that participants can save up to $7,000 per year in a Starter 401(k).

One key feature of Starter 401(k) plans is the requirement for automatic enrollment. This means that eligible employees will be automatically enrolled in the plan unless they choose to opt-out. Automatic enrollment has been shown to increase participation rates in retirement plans, helping more people save for their future.

It’s important to note that employers are not permitted to make contributions to Starter 401(k) plans, so the savings will solely consist of employee contributions.

5. Social Security Updates

Due to a cost-of-living adjustment (COLA), Social Security benefits are set to increase by 3.2% in 2024. This means that the average monthly benefit will rise to $1,907 in 2024. The COLA helps ensure that Social Security benefits keep pace with inflation, maintaining the purchasing power of retirees’ income.

The maximum monthly Social Security benefit will also increase. For those retiring at full retirement age (FRA), the maximum benefit will rise from $4,555 per month in 2023 to $4,873 per month in 2024.

Changes are also coming to the Social Security tax wage base and earnings limits. The wage base, which is the maximum amount of earnings subject to Social Security taxes, will increase from $160,200 in 2023 to $168,600 in 2024. This means that high earners could see an increase in their taxable income.

Retirees who have reached FRA in 2024 can earn up to $59,520 before their benefits are withheld.

6. New Catch-Up Contributions for High Earners

High-earning individuals will face a new requirement when making catch-up contributions to their retirement accounts. Those earning over $145,000 annually will be required to make all catch-up contributions on a Roth basis, using after-tax dollars. This means that these contributions will not be tax-deductible, but the earnings will grow tax-free, and qualified withdrawals in retirement will not be subject to income tax.

It’s important to note that the Roth basis requirement for catch-up contributions will not be enforced until 2026, giving high earners time to adjust their retirement savings strategies. The catch-up contribution limit for 2024 remains unchanged at $7,500 for those aged 50 and above.

7. Emergency Withdrawals and Penalty Exceptions

The SECURE 2.0 Act introduced new provisions for emergency withdrawals and penalty exceptions, providing more flexibility for individuals facing financial hardships.

One notable change is the ability to withdraw up to $1,000 per year from retirement accounts for qualifying financial emergencies without incurring the usual 10% early withdrawal penalty. To qualify for this penalty-free emergency distribution, individuals must self-certify that they have experienced an unforeseeable or immediate financial need.

Another significant update is the introduction of penalty-free early withdrawals for individuals who have experienced domestic abuse. This provision allows victims of domestic abuse to access their retirement funds without facing early withdrawal penalties, offering them financial support during a challenging time.

While these changes provide greater access to retirement funds in times of need, it’s crucial to remember that early withdrawals can negatively impact long-term retirement savings goals and potentially reduce any eligible tax advantages you may have recieved. Whenever possible, it’s advantageous to explore alternative sources of financial support before tapping into retirement accounts.

A financial advisor can help you navigate your options and make informed decisions that balance short-term needs with long-term financial security.

8. Student Loan Payment Matching

The SECURE 2.0 Act introduced an innovative way for employers to support their employees who are burdened with student loan debt. Under this new provision, employers can make matching contributions to an employee’s retirement plan based on the employee’s student loan payments.

This means that even if an employee is unable to contribute to their retirement account due to student loan obligations, their employer can still make contributions on their behalf, helping them save for retirement while they focus on repaying their loans.

To qualify for this student loan payment matching, the employee must make payments toward their student loans and provide proof of payment to their employer. The employer can then match a percentage of the employee’s student loan payment up to a certain limit and deposit the matched funds into the employee’s retirement account.

This provision applies to various retirement plans, including 401(k)s, 403(b)s, SIMPLE IRAs, and governmental 457(b) plans.

9. Enhanced Eligibility for Part-Time Workers

Starting in 2025, part-time employees will have greater access to retirement savings opportunities through their workplace retirement plans. The SECURE 2.0 Act has expanded eligibility for part-time workers, allowing those who have worked at least 500 hours per year for two consecutive years to participate in their employer’s retirement plan.

Part-time employees who meet the 500-hour requirement for two consecutive years will be able to contribute to their employer’s 401(k), 403(b), or other qualified workplace retirement plans. This means that more part-time workers will have the opportunity to save for retirement and potentially benefit from employer matching contributions, which can significantly boost their retirement savings over time.

Employers should be aware of this change and update their plan documents and processes accordingly to ensure compliance with the new eligibility rules. They should also communicate these changes to their part-time employees, educating them about the opportunity to participate in the workplace retirement plan and encouraging them to start saving for their future as soon as they become eligible.

10. Gradual Increase in FRA

In 2024, the FRA will reach 66 years and 8 months for those born in 1958.

For those born in 1959, FRA is 66 years and 10 months.

For those born in 1960 or later, FRA is 67.

It’s essential for individuals to understand their specific FRA based on their birth year, as claiming Social Security benefits before or after this age can significantly impact the amount of benefits they receive.

Claiming before FRA results in a permanent reduction in monthly benefits, while delaying benefits past FRA can lead to increased monthly payments.