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.
