The traditional Individual Retirement Account (IRA) has long been a cornerstone for retirement planning, offering tax advantages that help individuals grow their retirement savings. With the new updates for 2024, it’s crucial to understand how the latest regulations and limits can benefit both you and your clients.
In this blog, we’ll break down the 2024 contribution limits, key differences between Roth and Traditional IRAs, and highlight how tools like TaxPlanIQ can streamline your tax planning services.
For the 2024 tax year, the IRS allows individuals under 50 years old to contribute up to $7,000 to their IRAs. For those aged 50 or older, the limit is $8,000, thanks to the catch-up contribution provision, which helps older savers increase their retirement funds as they near retirement age.
It’s important to note that these limits apply across all IRA accounts, meaning if your client has both a traditional IRA and a Roth IRA, their total contributions cannot exceed the annual cap. While this might seem straightforward, the interaction between income levels and tax deductions can be complex, which is why accountants need to stay on top of the nuances for each client.
One of the key benefits of a traditional IRA is the potential for tax-deductible contributions. Unlike Roth IRAs, which are funded with post-tax dollars, contributions to a traditional IRA may lower your client's taxable income for the year they contribute, which is a significant benefit for those looking to reduce their current tax burden.
However, there are deduction limits based on modified adjusted gross income (MAGI) and whether the individual or their spouse has access to a retirement plan at work. For 2024, single filers earning up to $77,000 can deduct the full amount of their contributions, with partial deductions allowed for those earning between $77,000 and $87,000. Individuals earning more than $87,000 won’t be eligible for any deduction.
For joint filers, the deduction phase-out begins at $123,000 and ends at $143,000.
These income-based limits make it essential for accountants to offer personalized advice based on each client’s financial situation, and a tool like TaxPlanIQ can help you calculate and demonstrate the potential tax savings.
When advising clients on retirement strategies, the decision between a Roth IRA and a traditional IRA often comes down to tax considerations. The main difference lies in when taxes are paid. Contributions to a traditional IRA are typically tax-deductible in the year they're made, and the funds grow tax-deferred until retirement when withdrawals are taxed as ordinary income.
In contrast, Roth IRAs require contributions from after-tax income, but the growth and withdrawals are tax-free, provided certain conditions are met. For clients who expect to be in a higher tax bracket during retirement, a Roth IRA might make more sense. However, for those looking to reduce their tax liability today, the traditional IRA remains a solid option.
Encouraging your clients to weigh their current and future tax situation is key to selecting the best strategy. Keep in mind that for some clients, a combination of both Roth and traditional IRAs might be the best approach.
The SECURE 2.0 Act brought changes to Required Minimum Distributions (RMDs) for retirement accounts. As of 2024, the age at which IRA holders must begin taking RMDs has increased to 73, up from 72.
This extension allows clients to keep their funds growing tax-deferred for an additional year, potentially boosting retirement savings.
This change is beneficial for clients who don’t immediately need the income from their traditional IRA and prefer to let their investments grow longer. However, failing to take RMDs on time can result in hefty penalties, so it’s crucial for accountants to help clients navigate these deadlines.
As a tax professional, offering high-value advisory services, like retirement planning, can significantly increase client satisfaction and your firm’s revenue. But with the complexity of retirement accounts and IRS rules, having the right tools is essential.
TaxPlanIQ streamlines the tax planning process, allowing you to quickly identify and recommend retirement strategies, including the use of traditional and Roth IRAs. The software generates custom-branded tax plans, showing potential savings from strategies like maximizing IRA contributions. With easy-to-understand implementation steps and relevant IRS references, TaxPlanIQ empowers you to deliver high-quality advisory services efficiently.
Understanding the differences between Roth IRAs and traditional IRAs is essential for guiding your clients toward the best retirement strategy. For clients who benefit from immediate tax deductions, a traditional IRA can be a powerful tool for reducing taxable income while growing retirement savings. With the recent changes to contribution limits and RMD rules, now is the perfect time to revisit your clients' retirement strategies and make necessary adjustments.
By leveraging TaxPlanIQ, you can simplify the process, offer expert advice, and help your clients make informed decisions. Sign up for a free demo of TaxPlanIQ today to see how it can enhance your firm's tax planning capabilities and better serve your clients' retirement needs.