Physician Finances: 2024 Financial Updates and Strategies
By: Frank Yozwiak, CFP®, J.D., LL.M. in Taxation
Director of Estate Planning & Tax
How time flies! As we enter 2024, there are a few items to be aware of that have changed this year, and a few planning tips and strategies to keep in mind as you look ahead to the new year.
The new deferral limits for employer sponsored retirement plans (such as 401(k), 403(b), 457(b), TSP, etc.) have increased to $23,000 (up from $22,500 in 2023). If you are or will be age 50 or older at any point during the year, you can contribute an additional $7,500, or $30,500 in total.
The overall limit on additions to these plans, including employer match and profit share contributions has increased to $69,000 (up from $66,000 in 2023). For those who are self-employed, this is also the new limit for SEP IRAs, so long as that limit is not more than 25% of your self-employed compensation.
Traditional IRAs, Roth IRAs, and Roth Conversions
The contribution limits for Traditional and Roth IRAs have increased to $7,000 (up from $6,500 in 2023). Those who are or will be age 50 or older at any point in the year can contribute an additional $1,000, or $8,000 in total.
Higher income earners will start to be phased out of being able make direct Roth IRA contributions when their income reaches certain thresholds. In 2024, for single taxpayers that threshold begins when your modified adjusted gross income (MAGI) reaches $146,000. For married taxpayers filing jointly, that threshold begins when your MAGI reaches $230,000.
Keep in mind however that these thresholds are only related to Roth IRA contributions. Said another way, if your MAGI is above these thresholds, you can still defer into a Roth 401(k), Roth 403(b), Roth 457(b), Roth TSP, etc.
You can also make a non-deductible (after-tax) contribution into a Traditional IRA and convert it to Roth, regardless of your income level. However, if you go this route and you already have a pre-tax balance in your Traditional IRA, there will be a tax consequence on the conversion based on the pro-rata rule.
For example, assume you have a Traditional IRA with a pre-tax balance of $93,000 and then you make a non-deductible contribution of $7,000. Of the now $100,000 Traditional IRA balance, 7% is after-tax money and 93% is pre-tax money. If you convert any of that Traditional IRA to a Roth IRA, 93% of the conversion would be taxed at your ordinary income tax rate.
Those who will have a high deductible health plan (HDHP) for the entire year can make HSA contributions. The HSA limit for 2024 has increased to $4,150 for individuals and $8,300 for families. Many people think of an HSA as an account to use for medical expenses in a given year, which is true. However, many may not know that funds in an HSA can also be invested to grow for the future.
An HSA is the only type of account where you can get a tax deduction for contributions on the way in, invest the funds and let them grow, and then take a tax-free distribution on the way out – so long as the funds coming out are used for qualified medical expenses. Since there is a high likelihood that we will all have medical expenses in our retirement years, this can be a powerful planning tool.
Under the SECURE Act 2.0, if you will be age 73 or older in 2024, you will have to begin taking required minimum distributions (RMDs) from your Traditional IRA and workplace retirement accounts (i.e., 401(k), 403(b), 457(b), TSP, etc.). If you are still working, you do not have to take an RMD from your workplace retirement account until you retire, unless you are a 5% owner of the business sponsoring the plan. You also do not have to take an RMD from a Roth IRA, and thanks to the SECURE Act 2.0, beginning in 2024, you no longer have to take an RMD from a designated Roth 401(k) or 403(b) either.
For those who are charitably inclined, there are several strategies that can increase your benefit from a tax perspective. Those who are age 70 ½ or older can make a qualified charitable distribution (QCD) of up to $100,000 from your IRA. This limit is per-taxpayer, meaning a married couple can make a total QCD of $200,000 ($100,000 each). If you are of RMD age, making a QCD will also count towards satisfying your RMD for the year.
Alternatively, if you have highly appreciated securities in a standard taxable (i.e., brokerage) account, consider gifting the securities, rather than cash, directly to your charity of choice. You will receive the tax deduction for the fully appreciated value of the securities, but you will not incur the capital gains tax on selling the securities and donating the same amount in cash.
Another strategy to consider is bunching. With the standard deduction being as high as it is this year ($14,600 for single filers, $29,200 for joint filers, and even higher for those who are over age 65 or are blind), many donors may not ever see a tax benefit for their charitable gifts.
For example, imagine the generous couple who donates $25,000 every year to charity. With the standard deduction where it is now, they will not see a tax benefit from their donations each year because the standard deduction is higher than their annual charitable gifts. However, if they decide to bunch their gifts and donate $50,000 every other year, they will now enjoy the benefit of the higher deduction in their gifting years and use the standard deduction in the alternating years.
Debt Payoff Strategies
Finally, a good goal for almost everyone is to be debt free. Especially when it comes to consumer debt (i.e., credit card) or non-appreciating assets (i.e., most vehicles), establishing and following a plan to pay that down should be a priority. The task can seem overwhelming if you have multiple debts, but there are several strategies that can help you get started.
One strategy is to target the debt that has the highest interest rate and make extra principal payments on that debt. Once it is paid off, direct the required payment from the first debt plus the extra principal to the debt with the next highest interest rate, then repeat. This strategy can help you pay the least amount of interest over time. However, from a behavioral finance standpoint it may not be the best. If your highest interest debt is one of your larger debts, you may not get the satisfaction of paying off a single debt for several years.
Consider as an alternative the “snowball” strategy. Here, you would target the debt with the smallest balance and direct extra principal payments there. Once it is paid off, redirect the required payment from the first debt plus the extra principal to the next smallest debt. Over time you will create a snowball effect of your increasing payments to each successive debt. From a behavioral finance perspective, you will get the benefit of crossing debts off the list sooner, which can provide the encouragement to keep going.
Ballast is an employee-owned, financial planning and investment management firm located in Lexington, KY. Ballast provides individualized services to high-income earners, high-net-worth clients, and those individuals/businesses who have complex situations. To learn more about the intricacies of the information above or to learn about our firm, please visit BallastPlan.com, email us at firstname.lastname@example.org, or call our office at 859-226-0625.
Ballast, Inc. is a registered investment adviser with the SEC. Registration with the SEC does not indicate that the adviser has achieved a particular level of skill or ability, nor is it an endorsement by the SEC. All investment strategies have the potential for profit and loss. Ballast, Inc. is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation.