Important Changes to IRAs and Other Retirement Plans for 2024

Congress and the IRS have been busy changing the rules for IRAs and other qualified retirement plans.

The bulk of the recent changes were made in the SECURE Act 2.0 (enacted in late 2022) and its predecessor the SECURE Act (enacted in late 2019). SECURE is an acronym for Setting Every Community Up for Retirement Enhancement.

I introduced you to these changes as they were made. The start of 2024 is a good time to review and update them to be sure you’re clear on the rules and take advantage of all the opportunities available.

We start with the new 529-to-RothIRA Rollover. At times, too much money accumulates in a 529 college savings plan. This could happen when the account had high contributions or investment returns. It also could happen when the account beneficiary doesn’t complete the education, obtains scholarships or other financing or for other reasons spends less than anticipated.

In previous years, the owner’s options for the excess savings were to change the beneficiary or distribute the balance to the owner or the beneficiary for purposes other than paying qualified education expenses. Those distributions would be at least partly taxable and potentially subject to a penalty.

Under the SECURE Act 2.0, beginning in 2024, excess 529 funds can be rolled tax free over to a Roth IRA of the 529 plan beneficiary. It’s important that the rollover be to a Roth IRA of the 529 account beneficiary, who usually is not the account owner or a person who contributed to the account.

The 529 account must have been open for at least 15 years for the rollover to be tax free. Also, any contributions made to the 529 plan in the previous five years and their associated investment earnings can’t be rolled over tax free.

There’s a lifetime limit of $35,000 to the tax-free rollover. The limit is per beneficiary, not per account owner, according to how most tax professionals read the law.

For more details about the 529-to-Roth-IRA Rollover, its limits, and strategies for using it, see the August 2023 issue of Retirement Watch.

Two important changes were made to qualified longevity annuity contracts (QLACs), which are longevity annuities (also known as deferred income annuities) owned by traditional IRAs.

In a QLAC, the IRA transfers money to an insurer and the insurer promises to pay the IRA owner a fixed monthly or annual amount for the rest of the owner’s life. The payments can begin as early as age 72 but can’t begin for at least two years after the contract is signed. Income payments must begin by the time the owner turns age 85.

The IRA owner determines at the time the contract is signed when the payments will begin, and the insurer states the amount of the guaranteed income at that time.

The main benefit of a QLAC is that it defers some required minimum distributions (RMDs) because the balance invested in the QLAC isn’t used to compute RMDs. The owner is taxed only when QLAC distributions are received.

Another benefit to a QLAC is the insurer guarantees to make the income payments for life, no matter how long the IRA owner lives.

In the past, no more than 25% of an IRA could be deposited in QLACs. The 25% limit was eliminated by the SECURE Act 2.0.

In addition, the SECURE Act 2.0 increased the dollar amount that could be invested in QLACs to $200,000 (from $125,000) and provided that the limit would be indexed for inflation after 2024. The limit is per taxpayer, not per IRA.

For more details about QLACs, see the August 2023 issue of Retirement Watch.

Some changes were made to qualified charitable distributions (QCDs) from traditional IRAs.

A QCD can be made whenever a traditional IRA owner is age 70½ or older. The IRA transfers money directly to a charity. The distribution isn’t included in the IRA owner’s gross income, but it counts toward any RMD the owner is mandated to take that year.

The annual limit on QCDs is indexed for inflation for the first time in 2024. The 2024 QCD limit is $105,000. That limit is per taxpayer, not per IRA. Details about QCDs are in our April 2022 issue.

In addition, the SECURE Act 2.0 created a new type of QCD that’s generally called the Legacy IRA.

The Legacy IRA is a once-in-a-lifetime opportunity to transfer money from a traditional IRA to a “split-interest” charitable vehicle such as a charitable annuity or charitable remainder trust.

The split-interest vehicle pays you income for life or a period of years (whichever you chose). Then, whatever is left goes to a charity. Money is included in your gross income as it’s received from the split-interest vehicle.

A Legacy IRA contribution can be made only once during your lifetime and can’t exceed $53,000 in 2024. The limit is indexed for inflation each year. You don’t carry forward any unused part of the Legacy IRA limit. More about Legacy IRAs is in the June 2023 issue of Retirement Watch.

The SECURE Act 2.0 also provided for the first time that the catch-up contribution limit to IRAs for those ages 50 and over will be indexed for inflation. The limit has been fixed at $1,000 for years. It remains at $1,000 for 2024 but should increase in coming years.

The beginning age for RMDs was increased again in the SECURE Act 2.0.

If you turned 72 before 2022, you already were taking RMDs and continue to do so. Those who turned 72 in 2022 had to take their first RMD no later than April 1, 2023, and their second RMD by December 31, 2023, unless one of the exceptions applied.

Those who turned 72 in 2023 were able to defer their first RMDs one year.

For people who turn 73 in 2023 through 2032, the starting age for RMDs is 73 and the first RMD must be taken no later than April 1 of the year following the year they turn 73. But it’s best for most to take the first RMD in the year they turn 73 instead of waiting until April 1 of the following calendar year.

The beginning age for RMDs is 75 for those who turn 74 after December 31, 2032.

The penalty for missing RMDs finally is reduced from the longstanding 50% of the amount that should have been withdrawn to 25% of that amount.

In addition, the penalty can be reduced to only 10% if the mistake is corrected in a timely manner. This generally means you must take the RMD before the IRS sends you a notice of deficiency or before the last day of the second taxable year that begins after the year in which the RMD should have been taken, whichever is earlier.

A 401(k) plan change is that catchup contributions will be treated as Roth contributions after 2023 when made by an employee whose wages from that employer the previous year exceeded $145,000. This applies to both traditional and Roth 401(k)s. The wage amount is indexed for inflation.

This means those catch-up contributions will be included in the employee’s gross income for the year.

The change applies only if the plan allows all participants to choose whether catch-up contributions and other elective deferrals will be treated as either traditional contributions or Roth contributions. It applies only to employer plans, not to IRAs.

Under previous law, original owners of Roth 401(k) and Roth 403(b) accounts had to take RMDs during their lifetimes. This was a major difference between Roth IRAs and employer-sponsored Roth accounts. See our August 2022 issue for details.

After 2023, the RMD requirement for original owners is eliminated for employer-sponsored Roth accounts. Beneficiaries who inherit Roth IRAs or employer-sponsored Roth accounts still must take RMDs.