According to a 2021 study from the National Institute on Retirement Security, more than two-thirds of Americans believe there's a retirement crisis. The study also found that 58% of respondents believe they won't be able to achieve a secure retirement, and 65% of Americans believe they'll have to work past retirement age in order to have enough money to live.
And who wouldn't be worried? After all, the 2021 to 2022 inflationary period highlighted very well how the value of your spending dollars diminishes over time. Even though inflation appears to be on its way down at the moment, the Federal Reserve targets a 2% inflation rate, meaning your savings will need to grow at least that much, and preferably much more, over time.
Fortunately, the former Congress and current administration passed the Secure 2.0 Act in 2022, building on the 2019 Secure 1.0 Act that reformed the country's retirement system for the first time in more than a decade.
In 2024, several Secure 2.0 provisions are kicking in, with lots of opportunities for retirement savers to more flexibly contribute to and withdraw from tax-advantaged retirement accounts.
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1. Contribution limits just went up...again
Last year, contribution limits went up for both Traditional and Roth IRA plans, with the maximum contribution for both types of IRAs increasing from $6,000 to $6,500. In 2024, the maximum contribution will increase once again, to $7,000. That being said, the "catch-up" contribution for those 50 and older remains the same, at an extra $1,000.
It's not only IRAs; 401(k) plans are also getting a contribution boost. Employees with 401(k), 403(b), and most types of 457 plans will see a $500 increase in their contribution limits, from $22,500 to $23,000.
The greater contribution limits will allow Traditional IRA/401(k) savers to make more tax-deductible contributions, while Roth contributors will be able to invest a greater after-tax amount that can be withdrawn tax-free later on in life.
2. Withdrawal rules are becoming more flexible
Not only do workers have more flexibility in the amount they can contribute, but the Secure Act 2.0 has also loosened withdrawal rules as well.
For instance, prior to this year, retirement savers under 59 1/2 had been able to withdraw money from retirement accounts for an "immediate and heavy" financial need, with the cost of paying income taxes (which one would have to do anyway in retirement) plus a 10% penalty. But starting in 2024, savers can withdraw up to $1,000 without the 10% penalty, as long as they self-certify the money is going toward an emergency. And there is an even more flexible new caveat for victims of domestic abuse, who can now withdraw up to $10,000 without paying the 10% penalty thanks to Secure 2.0.
In addition, added withdrawal flexibility is coming specifically for Roth 401(k)s. Even though Roth 401(k) holders do not have to pay any tax on withdrawals after age 59 1/2, Roth 401(k) holders previously had to take withdrawals at 73 whether they wanted to or not. This was a noteable difference between Roth 401(k)s and Roth IRAs, which had no mandate to take withdrawals. After all, since there is no more tax revenue going to the government, it didn't much matter when Roth holders withdrew their funds.
The new 2024 provisions will fix this discrepancy, allowing those with Roth 401(k)s the same flexibility as those with Roth IRA plans, so Roth 401(k) savers no longer have to take withdrawals by age 73 if they don't want to.
Finally, more withdrawal flexibility is also coming for unused 529 Plans. 529s are state-sponsored, tax-advantaged investment accounts geared toward funding a beneficiary's education. While 529 plans differ by state, they generally offer investment options that can be deducted from the contributor's state income tax. Moreover, withdrawals are tax-free as long as the money is eventually used for a beneficiary's education.
But what if your beneficiary decides not to go college? In that case, the contributor would have to pay tax on the withdrawals, along with a 10% penalty. But starting in 2024, unused 529 plans can now be rolled over into a Roth IRA tax-free.
There are limits on the rollover option, however. 529 plans have to have been open at least 15 years, and you can only roll over a $35,000 lifetime maximum into the Roth. Still, that increased flexibility may spur more people to use this useful education savings account.
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3. More plan options and expanded coverage
In addition to greater flexibility for contributions and withdrawals, 2024 will also see greater plan accessibility.
Employers will now have the ability to match an employee's student loan payments instead of merely being restricted to match employee contributions. This is a great change, as young employees are often saddled with high student loan debt and may have to choose between paying off their student loans and contributing to their retirement. This new rule allows a middle ground, letting employers match an employee's student loan payment to their workplace retirement account. That could be a very desirable offering to attract employees and is a definite win-win.
In another offer to expand retirement savings for employees, 2024 will also see the first "Starter 401(k)" plans. These starter plans will now be available for employers that don't currently offer retirement plans and are sort of like "skinny" retirement offerings for smaller, cash-strapped businesses.
What distinguishes Starter 401(k)s is that they do away with some of the more burdensome regulations attached to larger plans. In exchange for the lower overhead and regulatory costs, the starter plans only allow for employee contributions, with no employer matching. In addition, there is only a $6,000 contribution limit (with a $1,000 catch-up), lower than your typical IRA. And businesses opting for Starter 401(k)s must auto-enroll their employees at 3% but no more than 15% of their salary, so employees can't opt out.
While these restrictions are something to be considered, the new rule should go a long way toward expanding access to tax-advantaged retirement plans for employees at smaller businesses.
All in all, the changes for contributions, withdrawals, and accessibility are all positives for retirement savers. Those just beginning their retirement-saving journey and even those with existing plans should definitely check out the new changes and take advantage of the best new features.
