What to Have on Your Tax Radar for 2024

Key Takeaways

• Now we’re just one year less away from when the Tax Cuts and Jobs Act tax cuts will expire. So, now you only have two years to get things done.
• Roth conversions, you have two years to look at these things, and have serious conversations with your advisors or look at yourselves, your own tax brackets for ‘24 or ‘25 and see if there’s room to at least move some of your IRA money to Roth, because if you don’t, the IRA balance is just going to grow, and it could be subject to much higher tax rates later on.
• What IRS is saying is use it or lose it when it comes to estate taxes exemptions. So, you may want to look at ways to start gifting funds out to lower your estate.

Christine Benz: Hi. I am Christine Benz from Morningstar. As we move into the new year, what are some of the key items that tax-savvy investors should have on their dashboards? Joining me to discuss that topic is tax- and retirement-planning expert Ed Slott.

Ed, thank you so much for being here.

Ed Slott: Great. Happy New Year to you.

What Should Investors Have on Their Tax Radar?

Benz: Happy New Year. So, we wanted to take a look forward into the year ahead and get your take on 2024 taxwise. What should people have on their radar? Are there any major changes going into effect this year?

Slott: Well, now we’re just one year less away from when the Tax Cuts and Jobs Act tax cuts will expire. So, now you only have two years to get things done. I remember in ‘23, I was talking about you had three years left. Well, now you only have two years left, ‘24 and ‘25. And rates are going to remain low, tax rates—and that’s the key, get money out, especially out of IRAs when tax rates are low. You’ll have this year and next year, and who knows what’s going to happen after that. I guess it depends on who is in office, what kind of Congress we have. But I’d say you have to start speeding up your plans to start whittling down, especially if you have a large IRA with Roth conversions, and start making plans and get a lot of that money out, even if you don’t have to, maybe you’re not subject to RMDs yet, but maybe it pays to start getting that money out earlier. Or otherwise, you could have a big problem years later.

2026 Tax Changes

Benz: Let’s discuss what is poised to change in 2026 barring congressional action. So, there will be higher income tax rates in effect. And maybe you can talk us through the connection with Roth conversions, why that would be advantageous to get ahead of that in advance of the sunsetting of those TCJA provisions.

Slott: Right, because you always want to get money out. Remember this money, when I’m talking about money, I’m talking about IRA money. This is money that will be taxed. It’s only tax-deferred, not tax-free, which means at some point it’s going to be taxed. It’s not if, but when. This money will be taxed. So, if you can make plans now to get it out while rates are low, you want to—like anything—you go to a store, you want things on sale. Taxes are on sale. The only thing different is: The thing in the store, you don’t actually have to buy, but the taxes, you do. There’s no choice there. So, you know this money has to be paid out anyway. Try not to be shortsighted and think “I’m saving money.” You’re not saving money because if it costs more later, overall, you could be left with less later. Plus, think beyond yourself to your beneficiaries that have this short window, only 10 years after death. Remember that came from the Secure Act, which means, the less you take, the more will be pushed into a shorter time period, and overall, the family will lose more money when more of it has to come out in a shorter time period.

So, Roth conversions, you have two years to look at these things, and I would have serious conversations with your advisors or look at yourselves, your own tax brackets for ‘24 or ‘25, and see if there’s room to at least move some of your IRA money to Roth, because if you don’t, the IRA balance is just going to grow, and it could be subject to much higher tax rates later on.

Accelerating IRA Withdrawals

Benz: How about accelerating IRA withdrawals? It seems like a lot of retirees have internalized this mindset of trying to defer their withdrawals as long as possible.

Slott: If you’re going to take the money out of the IRA, may as well convert it to the Roth. That’s what I’m talking about if you’re taking it out anyway. So, that’s what I’m talking about—voluntarily taking out before you even have to, and that’s the best time to do Roth conversions. This assumes you don’t need the money, so of course, you want to put it in a tax-free account. Remember with Roth conversions, it grows income-tax-free for the rest of your life and 10 years beyond to your beneficiaries, plus during your life, there’s no RMDs. And another change for 2024—if you have money in a Roth 401(k)—now, before 2024, you would have been subject to RMDs. Even though Roth IRAs were not subject to RMDs during your lifetime, Roth 401(k)s were. But Congress changed that. Starting in 2024, if you have a Roth 401(k), there are no RMDs from that Roth 401(k). So, that’s a good change.

Catch-Up Contributions

Benz: Right. Related to that, there are also some new rules—I think it was part of Secure 2.0—that related to older workers who were making these catch-up contributions and the catch-up contributions having to go into Roth accounts. What’s going on with that? I know there’s been a little bit of confusion.

Slott: A little bit of confusion? So much confusion—you don’t even have to worry about that provision because IRS just delayed it for two years because nobody knows what it means. But I’ll give you a version: Yes, that was supposed to go into effect. It’s good you brought it up because some people might look—like I have my little cheat sheet on Secure 2.0; I have it in there—to be effective for 2024. And what that said—Congress believed high-income earners—and that term is so relative, especially, I don’t know, is $145,000 a year in wages “high-income”? Maybe, in a Congress it is, but in certain, you have a regular family, I don’t really consider that high income, but maybe I’m skewed. I’m in New York. You’re in Chicago.

Benz: Probably.

Slott: Yeah. So, if your wages—and this was the age 50 or over catch-up contributions in a 401(k)—so the way a 401(k) works as opposed to a Roth 401(k), just like an IRA and a Roth IRA, with a 401(k), when you make contributions, it comes off the top. You get an exclusion from income. People call it a deduction. I’ve called it a deduction, but technically it’s not a real deduction. To me, a deduction is something you get to keep. You have a deduction for charity, a medical expense—you get that benefit. You never have to give it back. But when you say—just to give a simple example: You make $50,000 and you contribute $10,000 to your 401(k), you’re only taxed on $40,000, the net amount. So, in effect, you’ve got a deduction, but I don’t call it a deduction because that kind of deduction is only temporary. What that deduction really is, is a loan you’re taking from the government that has to be paid back at some future date plus the gains on that. So, that’s the difference between the 401(k) and the Roth 401(k).

So, here’s what Congress came in. They don’t like the deduction for high-income people because it takes money—it doesn’t produce revenue. It produces deficits. Deductions, Congress doesn’t like deductions. They like income. So, what they said in this provision that if you work for a company and you made more than $145,000 in the prior year, then that company will be forced to put your catch-up contributions into the Roth, denying you that deduction. But I don’t think that’s a horrible thing. Psychologically, people were complaining about it because it said so in the law that this is happening. “They’re forcing me to do it.” They’re forcing you to do what may be a great thing. But don’t worry, because they use the term, “Well, then you have to. Well, then I don’t want to.” No, it’s probably a good thing to go Roth because you’re building up a tax-free account. But people wanted the choice. So, it got so confusing. That was supposed to happen this year in 2024. IRS delayed that provision until 2026. So, if you’re in that position and you still want that deduction for your 401(k) contribution, you can still get it. Let’s say you make $200,000, and you want to go to the traditional 401(k) and get the deduction, you can do it for this year and next year.

Estate Taxes and TCJA

Benz: Good to know. Now, I want to touch on estate taxes, which also relate to the TCJA sunsetting in 2026. Let’s talk about what’s going on there. Very few estates today are subject to the estate tax. That potentially is set to change. What are the implications?

Slott: The original estate levels for the federal, forget about the state—don’t forget about the states; certain states have very high state estate taxes like my state, New York; so, that’s a different issue—we’re talking about the federal exemption was set at $10 million. And then, it went up through cost-of-living indexes, COLAs. Now, it’s up to over $13 million per person. So, a married couple over $26 million. But that $10 million is set to go back to half, $5 million plus the inflation indexes, in 2026. So, maybe it will be $7 million or $8 million by that time per person, which is still pretty healthy. But if you’re in that in-between area, you may want to look at tactics to reduce your estate, which you can do, in ‘24 or ‘25. Even IRS said a few years ago, let’s say, it’s $13 million; I’m just rounding it off. Let’s say you use the whole $13 million now. So, the question came up is, Well, what if it goes back to $7 million or so? Will you have to claw back what you took out? Because the exemption—we call it an estate exemption, but it’s also a gift exemption. You can use it during life. If you already used it, IRS has already said, “We’re not going to claw back. You can use it now.”

In essence, what IRS is saying is use it or lose it. So, you may want to look at ways to start gifting funds out to lower your estate. A sneaky way to lower your estate is to do a Roth conversion, especially a large Roth conversion, because the tax you’ll pay will come out. Obviously, you’ll have less money. Your estate could be lower, and the beneficiaries get the benefit of inheriting a Roth, plus you have no RMDs for the rest of your life. But you should look at reducing your estate if you feel that when it goes back to half—and I don’t know if it will, but it’s supposed to in 2026—think about ways, you have two years now, to reduce your estate. And there’s so many easy ways to do it. Without fancy estate planning or trusts or anything, you can just give money away each year, annual exclusions, you can give money away, make direct unlimited gifts for medical or tuition, and you can use the exemption itself during life. So, you don’t have to do anything fancy. The only caution I would say, if you’re doing that kind of gifting, don’t give regular cash, don’t give appreciated stocks, because you’d rather hold them till death, because when the beneficiaries inherit appreciated stocks, all that capital gain, that appreciation during your life, is eliminated. They don’t pay tax on any of that because of the step up in basis. So, don’t give that property. What you want to give is regular cash.

Benz: Ed, it’s always great to get your insights. Thank you so much for being here to talk about the year ahead.

Slott: All right. Thanks, Christine.

Benz: Thanks for watching. I’m Christine Benz for Morningstar.

Watch “Ed Slott: Roth Conversions Especially Attractive Before 2026″ for more from Christine Benz.