The new year is setting itself up to be a great time for participants to begin saving for retirement, as the Federal Reserve lowered its inflation projections for 2024 and the Internal Revenue Service (IRS) bumped up its 401(k) contribution limits.
In November, the IRS announced its $500 increase for 401(k), 403(b), Thrift Savings Plan (TSP), and most 547 plans from $22,500 to $23,000—a modest 2.2% increase from the year prior. Yet, as inflation declines to 2.4% for January 2024, experts are questioning whether retirement contributions will be able to outpace the future economic environment, especially when taking into account the market’s higher figures in 2023.
“Considering that inflation hovered at 3.2% as of October 2023 but reached as high as 9.1% in June 2022, investors may be getting less bang for those bucks,” said Michelle Riiska, financial planning analyst at eMoney Advisor, in an interview with 401(k) Specialist. “Similarly notable is that contributions to these plans remain the same as 2023 limits, causing concern about keeping up with inflation.”
However, changes in eligibility for deductible contributions to individual retirement accounts (IRAs) and contributions to Roth IRAs could provide an opportunity for participants to stash money into more advantageous accounts, Riiska noted. According to the IRS, the limit on annual contributions to an IRA will increase to $7,000, up from $6,500.
Furthermore, income ranges for determining eligibility to make deductible contributions to traditional IRAs, to contribute to Roth IRAs, and to claim the Saver’s Credit all saw increases for 2024. For example, taxpayers can deduct contributions to a traditional IRA if they meet certain conditions, like being covered by a workplace retirement plan or being married to someone who has employer-sponsored retirement plan coverage.
For those charitably minded, SECURE 2.0 included provisions that increase charitable deductions from $100,000 to $105,000—something to consider for those who hope to receive a tax deduction for charitable giving, added Riiska.
“For those who can max out their retirement plans, they should take advantage of any increases available. As we consider the time value of money, the more money that is stashed away earlier will have a longer time horizon to grow,” she explained. “Any missed opportunity to increase contributions can cut potential savings. After all, investors cannot go back in time to max out contributions for previous calendar years, so don’t miss out on the opportunity.”
‘Big year for Roth’
Given new rules that widen accessibility for Roth accounts in 2024, Riiska anticipates seeing more contributions towards the retirement savings vehicles.
Under new rules, employers will be allowed to make both matching and profit-sharing contributions on a Roth basis in the new year. Any catch-up contributions for employees aged 50 or older with wages about $145,000 must also be made as Roth contributions.
Additionally, unused 529 funds can be rolled over into Roth IRAs. However, participants should keep in mind that this rollover is subject to a $35,000 lifetime rollover cap and still limited to yearly Roth IRA contribution limits, Riiska said.
“This increase in Roth options will likely be attractive to many investors as the assets grow tax-free, giving more flexibility and freedom in retirement, especially if tax rates increase in the future,” she added.
HSAs as retirement savings vehicle
Another indicator of growth for 2024 are contribution limits for health savings accounts (HSAs), which the IRS announced would jump to $4,150 for self-only coverage and $8,300 for family coverage, up from $3,850 and $7,750, respectively.
To be eligible to contribute, a participant must have an HSA-qualified high-deductible health plan (HDHP) and not be enrolled in Medicare.
HSA account holders ages 55 and older can also add an extra $1,000 catch-up contribution, which means an older married couple could put away $10,300 a year, up from $9,750 this year.
HSAs have long been positioned as an effective tool for retirement savings, as money put into the product can be withdrawn at any point and will grow tax-free until participants reach retirement.
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