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Retirement Planning > Retirement Investing

Clients Retiring in 2024 Need to Know About These Changes

By Roger Wohlner

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What You Need to Know

  • The retirement landscape for 2024 and future years has changed with the passage of the Secure 2.0 Act.
  • Adjustments to RMDs include an increased age to start and their elimination in Roth 401(k) accounts.
  • A number of tax cuts are sunsetting at the end of 2025, perhaps most notably the lifetime estate tax exemption.

While there are planning issues for clients retiring in any year, the retirement landscape for 2024 and beyond has changed with the passage of the Secure 2.0 Act and other factors. 

Here are a number of issues for retiring clients to consider.

Increased RMD Ages

While not new for 2024, the increased age to start required minimum distributions — a key feature of the Secure 2.0 Act — continues to be a factor for those retiring in 2024 and beyond. Between now and 2033, the age to commence RMDs is 73, and beginning in 2033 this increases to 75.

The changes offer an added degree of planning flexibility for retiring clients. Depending when they retire, they might have several years until they need to tap traditional retirement accounts. This gives clients more options for retirement income planning in the years leading up to the commencement of RMDs in terms of which accounts to tap for income and in what order.

Higher Income Tax Brackets

Fueled by inflation, the upper end of both the income tax and long-term capital gains brackets are increasing. This means that a bit more income can be realized without putting clients in a higher tax bracket.

This provides clients with a bit more flexibility in terms of tapping retirement accounts or realizing capital gains in taxable accounts in order to provide income in the early years of retirement.

The 0% capital gains tax bracket’s top end for 2023 for single filers is $44,625 and increases to $47,025 for 2024. For those who are married and file jointly, the top-end numbers are $89,250 for 2023 and $94,050 for 2024. There are similar increases in the 15% and 20% capital gains tax brackets as well.

The wider brackets for income taxes also offer flexibility in areas such as doing a Roth conversion. This option may be more desirable for clients looking to diversify their retirement account tax structure, reduce future RMDs or build up funds in a Roth IRA as part of their estate planning strategy.

Tax Cut Sunsets

There are a number of tax cuts that are sunsetting at the end of 2025. Perhaps the most notable is the lifetime estate tax exemption. This may affect some clients, retired or not, and they likely will need help in planning for this reduced exemption.

Another tax cut sunset that could affect clients retiring in 2024 and beyond is the reversion of income tax rates to pre-2018 levels based on the expiration of the 2017 tax overhaul. These projected increased rates should be a part of retirement income planning with these clients in terms of which accounts to tap and in what order.

This change could also make Roth conversions more attractive in 2024 and 2025 before the sunsetting of the current tax rates. Besides paying less tax on the converted amounts, the money converted will not factor into future RMDs for clients who could potentially be subject to these higher tax rates.

No More RMDs on Roth 401(k)s

The Secure 2.0 Act eliminated RMDs on Roth 401(k)s and other Roth accounts in qualified plans such as a Roth 403(b). While these RMDs were never taxed, savers were required to remove money from these qualified plan accounts when they reached RMD age.

Some retiring clients may be in situations where the creditor protection features of a 401(k) umbrella can be beneficial. These might be clients in professions that could be subject to lawsuits such as doctors, attorneys and financial advisors. Even if they are retired, these clients still may face lawsuits from former patients and clients.

Additionally, if retiring clients’ 401(k)s offer outstanding investments, leaving the money in a Roth account in plan can allow them to reap the benefits of these investments after retirement. Any plan rules regarding former employees leaving funds in the plan should be considered as well.

Medicare Premiums

After declining for 2023, monthly premiums for Medicare Part B will increase from $164.90 to $174.70 in 2024. This represents a 6% increase. For clients who will be subject to an income-related monthly adjustment amount, known as an IRMAA surcharge, the increase in the increased Part B premiums is also 6% from 2023 to 2024 levels. The 2024 IRMAA surcharges are based on clients’ 2022 income level.

Clients who had a health savings account when working can use money from the HSA to cover Medicare premiums for Part B, Part D drug plans, Medicare Advantage premiums plus deductibles, coinsurance and copays. HSA funds cannot be used to pay premiums for Medigap supplement policies.

The ability to withdraw HSA funds tax-free is a great benefit for clients with such an account, as is the ability to invest the money to help offset future premium increases.

Interest Rates

The Federal Reserve recently said that while it is maintaining the federal funds rate in the 5.25% to 5.50% range, the announcement also indicated that we can potentially expect three rate cuts of 75 basis points each.

The Fed announcement could signal the end of the relatively high interest rates on savings accounts, money market funds, Treasurys, certificates of deposit and other low-risk, interest-bearing investments. These high interest rates have been a boon for many retirees, but lower interest rates can be favorable for clients approaching retirement as well. 

Positions in individual bonds or bond mutual funds and exchange-traded funds could receive a bump as interest rates decline. Lower interest rates could also help the stock portion of clients’ portfolios, at least in the short term.

One advantage of higher interest rates for clients heading into retirement is the ability to lock in relatively high rates on fixed annuities. If this is an appropriate product for your retiring client, it might pay to check on current offerings. 

Higher Contribution Limits

As happens in most years, contribution limits for 401(k)s, 403(b)s and other employer-sponsored retirement plans are increasing in 2024. 

If clients can afford to, before retiring in 2024, they should try to max out contributions to their employer’s plan. This adds to their retirement savings totals and can provide a tax benefit to the extent that the contributions are made to a traditional retirement account rather than a Roth account.

For clients who will be working for themselves in retirement, be sure to encourage them to establish a self-employed retirement plan such as a solo 401(k) or a SEP-IRA.

Roger Wohlner

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