Maximizing Retirement Contributions in 2024…and last chance considerations with 2023 tax filings

As we look ahead to financial planning for 2024, it’s crucial to explore avenues for maximizing retirement contributions, including what might still be possible before you finish filing tax year 2023. Whether we review this year or last year, one of the most advantageous strategies to consider is contributing to a Roth IRA. While there’s no immediate tax deduction for contributions to a Roth IRA, the benefits down the line are significant. Here’s what you need to know:

Tax-Free Growth and Withdrawals

Contributions to a Roth IRA are made on an after-tax basis, meaning you’ve already paid taxes on the money you contribute.  However, the earnings and growth within the account remain tax-deferred.  The real advantage comes during retirement when withdrawals can be made tax-free, provided the account has been open for at least five years, and the accountholder is over 59.5 years old.  This tax-free income can be a valuable asset in managing taxes and avoiding Medicare premium surcharges during retirement.

Flexible Withdrawals and Estate Planning

Roth IRAs offer flexibility in withdrawals, as they are not subject to required minimum distributions (RMDs) starting at age 73/75 like traditional retirement accounts.  This flexibility extends to estate planning, as Roth assets can be passed on to heirs tax-free, unlike traditional retirement accounts where tax implications may apply to beneficiaries.  Note that, unlike Roth accounts, most inherited retirement accounts, with today’s rules, are required to be liquidated – and taxed upon, within 10 years of the account holder’s passing.

Eligibility and Back-Door Contributions

To directly contribute to a Roth IRA, you must have earned income for the year, and your income must fall within certain limits. (Note: if you do not have earned income, but your spouse does – then consult your advisor on the merits of a Spousal Roth or Spousal Backdoor Roth IRA).  For 2024, these eligibility income limits are as follows:

• Single MAGI Phaseout: $145,000 – $161,000
• Married Filing Jointly (MFJ) MAGI Phaseout: $230,000 – $240,000NOTE: If you have not yet filed 2023 taxes, then take note of last year’s 2023 limits; you have time still before the tax deadline of April 15^th2024:
• Single MAGI Phaseout: $138,000 – $153,000
• Married Filing Jointly (MFJ) MAGI Phaseout: $218,000 – $228,000

Important disclaimer:  if your income exceeds these limits, you may still be able to contribute through a “Back-Door” Roth IRA contribution strategy.  This involves first making a non-deductible contribution to a traditional IRA and then taking that contribution amount and converting it to a Roth IRA.  It’s fairly easy enough to complete, so here are the steps for your review.

Steps for Back-Door Roth Contributions:

1. Contribute to a Traditional IRA: You can make non-deductible contributions to a traditional IRA regardless of income, with new and higher contribution limits for 2024 set at $7,000 for individuals under age 50, and $8,000 for those over age 50.
2. Confirm “Pro-Rata” Status: Before converting traditional IRA assets to a Roth IRA, assess your pro-rata status to determine the tax implications. This means that you should not have any other dollars in an IRA in your name.  Note: dollars in an employer plan like a 401(k) or 403(b) are just fine and acceptable – they will not count toward the IRS’s pro-rata rule.
3. Convert to a Roth IRA: Transfer funds from the traditional IRA to a Roth IRA. Timing and careful planning are essential to minimize tax implications, consult your advisor on the best steps and forms to complete here.
4. Fill Out Form 8606: Properly document the back-door Roth contribution on Form 8606 to ensure compliance with IRS regulations.  Consult your tax preparer to confirm, so they know that you have executed the Back-Door Roth, and if done correctly, it is a non-taxable Roth conversion event.
5. Repeat Annually: The back-door Roth strategy can be employed annually to maximize retirement savings, but be mindful of the pro-rata rule and consider additional strategies if you have other IRA assets.

In summary, it may be possible for you and your spouse to have Roth IRA assets to grow tax free, distribute income tax free, and be inherited tax free.  As an example, if a couple today, age 50 or older, has not yet filed taxes for 2023, they could cumulatively right now execute 2023 amounts of $7,500 ($15,000 total) and also $8,000 of Roth contributions each for 2024 ($16,000 total). These add up to $31,000 of Roth dollars to execute today for your future tax free growth and tax free retirement income in the future.

Disclaimer: Consultation with Professionals

As with any financial decision, it’s advisable to consult with a wealth advisor or tax professional to determine the best course of action based on your individual circumstances. They can provide personalized guidance and help navigate the complexities of retirement planning in 2024.

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