Barbara O'Neill: 2024 Changes Affecting 403(b) Participants
November 7, 2023
By Barbara O'Neill, CFP®, AFC®
Dr. Barbara O’Neill is the owner/CEO of Money Talk: Financial Planning Seminars and Publications where she writes, speaks, and reviews content about personal finance. She is a Distinguished Professor Emeritus at Rutgers University and a long-time 403(b) plan participant.
Less than two months remain in 2023 so now is a perfect time to look ahead to what 2024 has in store with respect to 403(b) plans. This knowledge can help inform financial decisions and tasks to complete by year-end (e.g., change paycheck deduction for retirement savings plan contributions).
Some of the changes described below are part of annual inflation-indexing of key numbers in the tax code (e.g., maximum contributions to retirement savings plans) and for Social Security. Others are provisions of the SECURE 2.0 Act that take effect in 2024 (e.g., an allowable emergency personal expense distribution).
This post describes 2024 changes affecting 403(b) plan participants including contribution limits (for 403(b)s, IRAs, and HSAs), catch-up provisions, the Saver’s Credit, Social Security rules, and SECURE 2.0 provisions. It also summarizes two research studies about the impact of higher catch-up contribution limits as well as three “need to know” facts and six take-away action steps.
Income Tax Changes
Each fall, the Internal Revenue Service (IRS) announces inflation adjustments affecting the maximum amount that can be contributed to employer retirement savings plans and other retirement related items (e.g., IRAs and the Saver’s Credit). Below is a brief summary:
403(b) Plans
The contribution limit for 403(b) plans is $23,000 in 2024 for workers under age 50, up $500 from $22,500 in 2023. The extra $500 amounts to about $23 per paycheck for plan participants with 22 bi-weekly paychecks per year and about $19 for those with 26 bi-weekly paychecks. For workers age 50+ in 2024, the contribution limit is $30,500: $23,000 plus a maximum $7,500 catch-up limit.
There is no income limit for 403(b) contributions but there is a maximum IRS aggregate defined contribution plan limit for all retirement plan savings ($69,000 in 2024).
Individual Retirement Accounts (IRAs)
The contribution limit for traditional and/or Roth IRAs is $7,000 in 2024 for workers under age 50, up $500 from $6,500 in 2023. For workers age 50+ in 2024, the contribution limit is $8,000: $7,000 plus a maximum $1,000 catch-up limit.
Roth IRA contributions are made with after-tax dollars (money that has already been taxed). There is no upfront tax deduction to subtract on an income tax return but withdrawals are tax-free if a Roth IRA is open at least five years and a taxpayer has reached age 59½.
Traditional IRA contributions are made with pre-tax dollars and may or may not be tax-deductible. Since 403(b) plan participants have access to a 403(b) and/or pension, they are subject to an income-related IRA tax deduction rule. With employer plan participation, the availability of a tax deduction depends on modified adjusted gross income (MAGI). In 2024, the phase-out range for tax-deductible contributions is between $77,000 and $87,000 for single taxpayers and between $116,000 and $136,000 for married couples filing jointly. Above those income ranges, no upfront tax deduction is allowed.
Health Savings Accounts (HSAs)
Some 403(b) participants with a high-deductible health plan (HDHP) have access to health savings accounts (HSAs) to pay for qualified medical expenses. HSAs are also a “back-door” retirement account because money can be withdrawn for non-medical purposes once someone reaches age 65 without paying a penalty. Nonmedical withdrawals are taxed as ordinary income just like traditional IRA withdrawals.
The annual contribution limit for HSAs for individual coverage is $4,150 in 2024. The annual limit for family coverage is $8,300. For individuals between 55 and 64, an additional $1,000 catch-up contribution is allowed. HDHP deductibles must be at least $1,600 for individual coverage and $3,200 for family coverage to qualify for a HSA in 2024.
Saver’s Credit
Some 403(b) plan participants with low and moderate incomes are eligible for the Saver’s Credit (a.k.a., Retirement Savings Contributions Credit). The credit, which is subtracted dollar-for-dollar from taxes due, is 10%, 20%, or 50% of retirement savings contributions (depending on tax filing status and adjusted gross income), up to $2,000 for single taxpayers and $4,000 for married couples filing jointly.
In 2024, the income limit above which the Saver’s Credit is no longer available is $76,500 for married couples filing jointly (vs. $73,000 in 2023), $57,375 for heads of household (vs. $54,750 in 2023), and $38,250 for singles and married persons filing separately (vs. $36,500 in 2023).
Social Security Changes
Each fall, the Social Security Administration distributes a fact sheet that lists inflation-indexed changes including those described below.
Quarter of Coverage
Forty quarters (10 years) of work are needed to qualify for retirement benefits. Some 403(b) participants are covered by Social Security through their primary career (e.g., teaching) and some are not. Those without coverage can still earn 40 quarters and qualify for benefits from earnings before, after, and/or during (e.g., side hustles and summer jobs) their primary career.
In 2024, a quarter of coverage requires $1,730 of earnings, up from $1,640 in 2023. The maximum four quarters per year can be earned with $6,920 of income ($1,730 x 4).
Maximum Taxable Earnings
Some 403(b) plan participants (think K-12 public school and university administrators and CEOs of hospitals and non-profit organizations) earn high six-figure salaries. Maximum taxable earnings for Social Security in 2024 is $168,600, up from $160,200 in 2023. At all income levels, the Social Security and Medicare (FICA) tax rate remains at 7.65% for employees.
Changes Affecting Retirees
Retired 403(b) participants who receive Social Security will receive a 3.2% cost-of-living adjustment (COLA) in 2024, down from 8.7% in 2023. The COLA reflects a decrease in the inflation rate during the past year. The earnings limit for those who claim Social Security prior to their full retirement age is $1,860 per month ($22,320 per year), up from $1,770 per month ($21,240 per year) in 2023.
SECURE 2.0 Provisions
Below is a brief summary of some SECURE 2.0 provisions that take effect in 2024:
Financial Emergency Distributions
There are new exceptions to the 10% early withdrawal penalty for retirement accounts including natural disasters, terminal illness, emergency expenses, and self-certified domestic abuse. Specific rules apply. For example, the withdrawal limit for financial emergencies is $1,000, with the option to repay the money within three years. The domestic abuse victim withdrawal limit is the lesser of 50% of account value or $10,000.
Financial Emergency Contributions
Roth emergency savings accounts linked to employer retirement savings can allow up to $2,500 of contributions per year. Funds can be used penalty- and tax-free for self-attested hardship situations.
RMD at Age 73
Retired 403(b) plan participants born in 1951 who turn 72 in 2023 and 73 in 2024 must start taking required minimum distributions (RMDs) either sometime in 2024 or no later than April 1, 2025. Age 73 is the RMD start date for those born between 1951 and 1959 and age 75 is the start date for those born in 1960 or later.
Roth 403(b) RMDs
RMDs are eliminated in 2024 Roth-designated employer 403(b) plans, thereby keeping these accounts intact for an account owner’s lifetime and making the rule for employer plans the same as for Roth IRAs.
Student Loan Debt
Some non-profit sector employers match their employee’s 403(b) contributions. Starting in 2024, they are allowed to match retirement plan participants’ student loan payments using the same vesting and matching schedule as retirement plan deposits. The match money will go into a worker’s 403(b) account, not to pay off debt, and employers will rely on employees’ self-certification of loan payments.
Catch-Up Contributions
The $1,000 catch-up limit for IRA contributions by workers age 50 and over will be indexed for inflation starting in 2024.
Research Results
Speaking of catch-up retirement savings plan contributions, two empirical studies explored their impact on overall retirement savings. A study by Lavecchia found that eligibility for catch-up limits was associated with a large increase in tax-deferred contributions for workers without an workplace savings plan. Specifically a 25% increase in average IRA contributions and a 21% increase in the likelihood of making an IRA contribution. No significant effect was found for workplace plan contributions. Rutledge et al. found that, compared to younger workers, contributions to private sector 401(k) plans increased by $540 more among those age 50+, suggesting that older workers respond to expanded tax incentives.
Three (More) Things
- 2024 income phase-out ranges for eligibility to contribute to a Roth IRA are between $146,000 and $161,000 for singles and between $230,000 and $240,000 for married couples filing jointly.
- The SECURE 2.0 law has 92 loosely related sections pertaining to retirement savings with changes that are gradually being implemented between 2023 and 2027.
- Workers who can afford it can fully “max out” both 403(b) plan and IRA contributions for a total of $30,000 of annual savings in 2024 under age 50 ($23,000 + $7,000) and $38,500 at age 50+ ($30,500 + $8,000).
Six Smart Strategies
No. 1: Take Action Now — If you want to make changes that will take effect in January 2024, you may need to take action by early- to mid-December 2023. For example, changing tax withholding or 403(b) plan contributions.
No. 2: Save More If You Can — Take advantage of the increased contribution limits available in 2024. The extra $500 apiece for a 403(b) and IRA will add up over time.
No. 3: Maintain an Adequate Emergency Fund — The $1,000 penalty-free withdrawal from retirement accounts for financial emergencies is better than nothing but many unexpected events cost more. Aim to save three to six months of essential living expenses.
No. 4: Model Savings Outcomes — Picture your “future self” as a friend who you want to have a comfortable future, rather than as a total stranger. Then try several retirement calculators to determine how much you could save for this “person.”
No. 5: Give Yourself a Financial Check-Up — Get a jumpstart on 2024! Prepare a net worth statement (assets minus debts), cash flow statement (past income minus expenses) and a spending plan; a.k.a., budget (projected future income and expenses).
No. 6: Get Help If Needed — Good sources of information for questions related to retirement savings plans are employer Human Resources offices, 403(b) account vendors, tax advisors, and fee-only financial planners.
In Summary
Not only are death and taxes certain to happen in life, but so are annual income tax law changes. 2024 will be here before you know it. Take the time now to prepare for announced changes due to inflation indexing and the SECURE 2.0 law that will affect you as a taxpayer and 403(b) plan participant.
This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.
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Dr. O'Neill is the owner/CEO of Money Talk: Financial Planning Seminars and Publications where she writes, speaks, and reviews content about personal finance. She is a Distinguished Professor Emeritus at Rutgers University and a long-time 403(b) plan participant.