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Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and it's that time of the year when I update and share my two-page tax cheat sheet for the upcoming year. One listener recently wrote to me saying that he does a lot of planning around taxes, IRMA, et cetera, and it's the best cheat sheet that he's come across. I'll be sharing how you can grab the document in today's episode, as well as sharing four big retirement and tax planning updates for 2024.
So if you're wrapping up your year-end planning and starting to think about 2024 and beyond, you will enjoy today's episode. To grab the links and resources mentioned, just head over to youstaywealthy.com forward slash 207.
Before we dive into the four big tax changes, be sure to go and grab my updated tax cheat sheet for 2024. The document is nicely organized on two pages, and it includes updated important numbers that you will most certainly want to reference throughout the next year. Federal income tax brackets, alternative minimum tax changes, long-term capital gains brackets, new standard deduction amounts, social security wage base and earning limits, and
Thank you so much for joining us today.
And if you find retirement resources like these helpful, I'd love for you to consider joining the Stay Wealthy Retirement Newsletter. Every week, I personally write and send something valuable and helpful for retirement savers. Tax and planning tips, concise summaries of new laws like the Secure Act 2.0, timely economic updates, and free retirement guides and checklists just like the tax cheat sheet that you're getting today.
In fact, in next week's issue, all newsletter subscribers will be receiving five of my favorite interactive checklists and flowcharts that are directly relevant to retirement and tax planning decisions that you'll be making in 2024.
to subscribe to the newsletter and be sure that you receive those free resources next week. Just go to youstaywealthy.com forward slash email. That's youstaywealthy.com forward slash email. Worst case scenario, you don't find the newsletter helpful and you unsubscribe. I'm not spamming anyone or holding them hostage. My only goal here is to provide accurate and helpful retirement information to those who want it. Information that's more easily consumed and delivered in a written format instead of a podcast.
Okay, let's get to the four big retirement and tax planning changes that you need to know about in 2024.
The first update is likely one that's already crossed your desk, but I wouldn't be doing my job here as a retirement podcast host if I didn't at least highlight it and also provide some additional details that you may not be taking into consideration. And this update is that social security payments are once again going up next year. Specifically, over 71 million Americans will see a 3.2% increase in their social security benefits in 2024.
This increase is a result of the annual cost of living adjustment or COLA for short, which helps social security recipients retain their buying power in the face of inflation. In other words, prices for goods and services are higher this year than last. And this increase in social security payments, which will be about $60 more per month on average, helps to offset those higher costs. It helps to protect the purchasing power of retirees.
And while this benefit increase is welcomed by recipients, it's important not to rely on these adjustments, these increases every year. In fact, last year served as a really good reminder of this when social security benefits increased by 8.7%. Do you know the last time we saw an increase of over 8%? It was 42 years ago, and it could very well be another 40 plus years until we see that sort of increase again.
Historically, increases have hovered around low single digits, 1 to 4%. And in some years, like 2009, 2010, and 2015, there were no adjustments at all. We can also probably throw 2016 in there as well, since the adjustment that year was only 0.3%. And if you want to comb through the data yourself, I'll link to the history of COLA adjustments in today's show notes.
So again, a higher social security benefit is of course welcomed, but it's important not to rely on three plus percent adjustments year after year after year, especially as we see inflation starting to cool and trend back down towards pre 2020 levels. Sticking with social security briefly, the second update to share with you today is an increase to the social security tax cap, which affects listeners who are still employed and earning an income.
As a reminder, those in the working world send 6.2% of their annual earnings to social security or 12.4% if self-employed, but only until their income reaches a certain threshold. This threshold is often referred to as the social security tax cap, and it's increasing by just over $8,000 next year, bringing the cap or the threshold up to $168,400.
In short, when and if your income exceeds $168,400, you'll see a bump in your take-home pay because you'll no longer be sending 6.2% of your income to the Social Security Administration. To put it simply, this change, this increase to the cap in 2024 will expose more of your income to taxes and in turn, put more of your tax dollars in the Social Security Administration's pocket.
Also, for those who are currently taking social security and also continue to work and earn an income, you'll be able to earn $1,080 more in 2024 before a percentage of your benefit is temporarily withheld. Here's how this plays out.
If you are younger than your full retirement age, taking Social Security and still working, you can earn up to $22,320 of income in 2024 before Social Security benefits begin to get withheld.
But for those of you who are in the year you turn your full retirement age and you're still working, you can earn up to $59,520 in 2024, just over a $3,000 increase from 2023. As a reminder, after your full retirement age is reached, there is no penalty for working while collecting Social Security benefits.
Okay, before we move away from Social Security, there's one little sneaky tax increase that flies under the radar every year that's worth highlighting. And that is the lack of an inflation adjustment on the taxability of Social Security payments. Let me explain. As most know, up to 85% of your Social Security benefits can be taxed if your modified adjusted gross income drops.
Plus one half of your social security income exceeds $34,000 as a single filer and $44,000 as a joint filer. Well, as wages increase, portfolio values grow and retirees receive cost of living adjustments on pensions and social security income, more and more retirees, whether they realize it or not, are being exposed to a larger percentage of their social security benefits being taxed.
This formula for the taxability of Social Security income and these income numbers have never been adjusted for inflation. So more income earned by recipients means more tax revenue for the administration without having to announce any major changes and make headlines.
Okay, the third update to share with you today is a result of the SECURE Act 2.0. As a reminder, the SECURE Act 2.0 became law toward the end of 2022. And the purpose was to help people better prepare for retirement by providing additional opportunities for them to catch up on their savings.
And while some of these initiatives were rolled out this year in 2023, there are some lingering changes and improvements going into effect next year in 2024. Most notable, and the one that will have most of our listeners clapping, even if it doesn't directly affect them, is the historically strange RMD rule for Roth 401ks that has finally been changed.
So to preface, we all know that retirement accounts like traditional 401ks and traditional IRAs, they have required minimum distributions that must begin at either age 73 or 75.
And it makes sense that these required distributions exist for traditional IRAs and traditional 401ks because they are pre-tax accounts. Retirement savers contributed pre-tax earnings into these accounts and they were permitted to defer paying the taxes their entire working career.
The IRS, of course, wants their cut at some point. So at age 73 or 75, they come knocking on your door and force you to begin taking some withdrawals each year. Those withdrawals are taxed as ordinary income, enabling the IRS to collect their share based on your income tax rate. Again, makes sense that the IRS would not allow us to defer paying taxes forever on that money.
But what has never really made sense is that Roth 401ks have historically also had required minimum distributions. As a reminder, Roth 401ks are after-tax retirement savings accounts. You earn money working, you pay taxes on those earnings, and then you contribute after-tax dollars to the Roth 401k so the money can be invested and grow tax-free.
In other words, unlike a traditional 401k, the IRS already got their cut of your income when you earned it prior to making your Roth 401k contributions.
So why have they historically forced you to take required distributions from this account in your 70s? And why would they force you to take distributions from a Roth 401k, but not a Roth IRA? Roth IRAs are nearly identical, except for lower contribution limits, which also doesn't make sense. And the fact that they're owned and held outside of an employer plan.
Other than those minor differences, they are after-tax retirement savings vehicles just like Roth 401ks. But for some odd reason, Roth IRAs don't have required distributions and Roth 401ks do until the calendar turns and we finally head into 2024.
This change is a result of the Secure Act 2.0, and it now means that investors with Roth 401ks and or Roth 403bs will no longer need to take required minimum distributions beginning in 2024. Roth 401ks and Roth 403bs will be treated just like their counterpart, Roth IRAs.
Prior to this simple yet welcome change, rolling a Roth 401k into a Roth IRA before RMD age was a no-brainer for most people. But now, in 2024, they don't have to rush to do this if it's not in their best interest. If for any reason at all someone prefers to keep their Roth 401k or Roth 403b in their employer plan, they can do so next year without having to worry about those pesky RMDs.
And while most people do eventually roll their Roth 401ks into one single Roth IRA to consolidate their accounts with one institution or gain access to better, potentially lower cost investment options, at least they can now make that decision on a level playing field and when it makes the most sense for them.
So why has this historically been the case? Why did after-tax Roth 401ks have RMDs when their identical counterpart, Roth IRAs, did not? Well, in short, that's just how the original law was written. And we're all too familiar with the lack of logic sometimes used by these lawmakers. We're also familiar with how long it can take for these laws to change.
Fortunately, we don't have to wait any longer for this one. But to be fair, I do think there was some logic used by lawmakers when they originally decided to force required minimum distributions on Roth 401ks. It was just logic that benefited the IRS, not retirement savers.
Their selfish logic here was that forcing money out of a Roth 401k through these required distributions would lead to an uptick in tax revenue. And that's because the forced withdrawals would likely get reinvested into something that would generate capital gains tax or interest income.
As most know, all earnings on money inside of a Roth account are tax-free. No capital gains tax and no interest or dividend income. And to top it off, withdrawals are also 100% tax-free. So while the IRS did get paid when you originally earned those dollars that were contributed to your Roth...
they aren't getting paid another penny from that bucket of money until your heirs inherit it, liquidate it within the required 10-year time period, and then reinvest the proceeds outside of a tax-advantaged account. So you can see why originally lawmakers did decide to force those required minimum distributions, but we're excited that it's a level playing field now and that Roth 401ks and 403bs will be treated just like Roth IRAs.
Okay, the fourth and final tax change to share with you today technically is not set to go into effect until 2026. But the fact that we're only two years out means that we have a short window to potentially take advantage of some good planning opportunities that still exist before things change.
And that change is the sunsetting of the Tax Cut and Jobs Act, or sometimes referred to as the Trump-era tax cuts. These tax cuts were enacted in 2017, and they're set to expire at the end of 2025. And while this overhaul of the tax code did cause higher taxes for some people, most Americans saw a net reduction in their tax bill as a result.
With these tax cuts set to expire in two years, those very Americans who saw a reduction are most likely the ones who will see an increase in 2026.
Before we get into a near-term planning opportunity that this upcoming change potentially creates, it's worth highlighting that just because these tax cuts are currently set to expire doesn't necessarily mean that they will expire. 2024 is an election year, and it's probably fair to say that neither party wants to be the one who appears responsible for a widespread spike in taxes.
Given that, it's certainly possible that parties meet in the middle and maintain some of the tax cuts from 2017.
But because we don't have a crystal ball and we don't know exactly what will happen with the tax code ahead of 2026, we have to make the best possible decisions today with the information that we do have. And one of those decisions is to potentially be more aggressive with our Roth conversions in 2024 and 2025 before federal tax brackets revert to their pre-tax cuts and jobs act levels.
A retiree who's determined that Roth conversions are fitting for their situation may consider being more aggressive next year because if the tax cuts do in fact expire, marginal tax rates will go up across the board. The 12% bracket jumps back to 15%, the 22% jumps to 25%, and the 24% jumps up to 28%. The other three higher brackets increase slightly as well, but just not as significantly.
So in short, for the right person and assuming the tax cuts do revert back in 2026 as planned, it might make sense to be slightly more aggressive with Roth conversions these next two years. For example, it might make sense to fill up the 24% bracket these next two years before the 22% bracket turns into the 25% and the 24% turns into the 28%.
In other words, you may be able to get some extra money out of your pre-tax accounts and into a Roth IRA through a conversion at a lower rate today than in 2026 and beyond.
Pursuing Roth conversions, especially aggressive Roth conversions, depends on a number of important factors, including your age, when RMDs begin, your current tax rate versus your projected future tax rate, your retirement needs and goals, and of course, your available cash to pay the tax bill on these annual conversions. It also depends on things outside of your control, like what may actually happen to these tax cuts and the tax code as we go through an election year and get closer to 2026.
But,
But even if we don't know exactly what federal tax brackets will look like in the not so distant future, some listeners may still have some strong feelings about the direction of tax rates in this country. In other words, it's not terribly uncommon for people to strongly believe that tax rates will be higher in the future than they are today, leading them to pursue Roth conversions, take care of the tax bill now and grow their nest egg tax-free inside of their Roth IRA.
Roth conversions are a giant topic and there's so much to understand and consider. If you want to dive deeper and you want to learn more, I'd encourage you to check out or revisit my two-part Roth conversion series, which I'll link to in today's show notes. And please, please, please, please talk to your trusted advisors, your financial planner, your accountant, any other important professionals in your life before taking action.
In addition to the things shared today, there are a number of other tax changes to be aware of that may or may not create an opportunity as a result of the Secure Act 2.0 and the Tax Cuts and Jobs Act expiring at the end of 2025.
Automatic 401k enrollment, the ability for employers to match student loan payments with matching payments to a retirement account, higher catch-up contribution limits, estate exemption amount changes, deductibility of mortgage interest, penalty-free hardship withdrawals, and more.
I won't put you to sleep by going through every little change today, but I will link to some great resources in today's show notes if you want to get caught up and better understand what may impact your personal situation in 2024 and beyond.
Once again, to grab today's show notes and grab your two-page 2024 tax cheat sheet, just head over to youstaywealthy.com forward slash 207. And don't forget to join the Stay Wealthy newsletter. One week from today, all subscribers will be receiving my five favorite retirement checklists and flow charts to help guide their planning decisions in 2024 and beyond.
Once again, to join the newsletter, just head over to youstaywealthy.com forward slash email. Thank you as always for listening. Enjoy the upcoming holidays with your loved ones. And I will see everyone back here next week for an extra special episode that I have lined up.
This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.
