Retirement insights from a Colorado PERA perspective

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The Internal Revenue Service (IRS) announced inflation adjustments for many tax provisions in 2024, including higher contribution limits for various types of accounts and updated tax brackets.



<h2 class="wp-block-heading">Retirement account contribution limits</h2>



The IRS <a href="https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000" target="_blank" rel="noreferrer noopener">increased contribution limits</a> for individual retirement accounts (IRAs), as well as 401(k), 403(b), and most 457 plans.



The maximum amount a worker can contribute to 401(k)/403(b)/457 plans is $23,000 in 2024, an increase of $500. The IRA contribution limit also increased $500 to $7,000. Catch-up contribution limits remain unchanged in 2024.



<h2 class="wp-block-heading">HSA &amp; FSA contribution limits</h2>



The amount workers can contribute to medical savings accounts will also increase in 2024.



Individuals enrolled in a high deductible health plan (HDHP) with a health savings account (HSA) will be able to contribute up to $4,150 and those with family coverage will be able to save a maximum of $8,300.



For workers who don’t have an HDHP with an HSA and instead use a flexible spending account (FSA), the maximum contribution for 2024 is $3,200. For plans that allow unused balances to roll over, the maximum amount that can be rolled over will increase to $640.



<h2 class="wp-block-heading">2024 tax rates</h2>



Below are <a href="https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024" target="_blank" rel="noreferrer noopener">updated marginal tax rates</a> for single taxpayers and married couples filing jointly. See the <a href="https://www.irs.gov/irb/2023-48_IRB#REV-PROC-2023-34" target="_blank" rel="noreferrer noopener">IRS website</a> for more tax tables and additional details. Since these changes will take effect for tax year 2024, they will generally apply to tax returns filed in 2025.



<ul>
<li>10% for incomes of $11,600 or less ($23,200 for married couples filing jointly)</li>



<li>12% for incomes over $11,600 ($23,200 for married couples filing jointly)</li>



<li>22% for incomes over $47,150 ($94,300 for married couples filing jointly)</li>



<li>24% for incomes over $100,525 ($201,050 for married couples filing jointly)</li>



<li>32% for incomes over $191,950 ($383,900 for married couples filing jointly)</li>



<li>35% for incomes over $243,725 ($487,450 for married couples filing jointly)</li>



<li>37% for incomes over $609,350 ($731,200 for married couples filing jointly)</li>
</ul>



In addition to updated tax rates, the IRS announced increases to the standard deduction for tax year 2024:



<ul>
<li>Single taxpayers and married couples filing separately: $14,600 ($750 increase)</li>



<li>Heads of household: $21,900 ($1,100 increase)</li>



<li>Married couples filing jointly: $29,200 ($1,500 increase)</li>
</ul>



Visit the <a href="https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024" target="_blank" rel="noreferrer noopener">IRS website</a> for more adjustments and tax changes for 2024.



<h2 class="wp-block-heading">PERA benefits and taxes</h2>



Colorado PERA benefits are subject to federal income tax, as well as applicable state and local taxes. PERA retirees who would like to update their tax withholding can do so by <a href="https://www.copera.org/member-login-registration" target="_blank" rel="noreferrer noopener">logging in</a> to their secure member account or completing a paper Form W-4P. Learn more information at <a href="https://www.copera.org/taxes-on-benefits" target="_blank" rel="noreferrer noopener">copera.org/taxes-on-benefits</a>.

Updated Tax Brackets, Contribution Limits, Other Changes for 2024

In 2019, Congress passed sweeping legislation known as the SECURE Act that ushered in some major changes in retirement plans. One of those changes was making it easier for employer-sponsored plans like 401(k)s to offer annuities to plan participants.



Since then, consumer interest in annuities has grown, and 2020 <a href="https://www.fa-mag.com/news/total-annuity-sales-rose-16--last-year-to--255b-66117.html" target="_blank" rel="noreferrer noopener" class="broken_link">saw the highest annuity sales in over a decade</a>, totaling nearly $255 billion.



PERA now has two annuity products to offer participants in the <a href="https://www.copera.org/peraplus-401-k-457-plans" target="_blank" rel="noreferrer noopener">PERAPlus 401(k), 457</a> and DC plans.



<h2 class="wp-block-heading" id="what-is-an-annuity">What is an annuity?</h2>



Simply put, an annuity is a financial product that provides guaranteed, regular payments — either for a fixed amount of time or for a person’s life. PERA’s Defined Benefit (DB) plan and Social Security are both annuities that provide a lifetime retirement benefit.



While PERA’s DB plan offers lifetime income in retirement, workers who save on their own in a defined contribution plan like a 401(k) risk running out of savings in retirement. Annuities, which are usually available for purchase through insurance companies, can help offset this risk by converting all or a portion of a person’s account balance into regular income. Like a pension, annuities collect or “pool” assets from a large number of individuals in order to provide each person with guaranteed payments.



There are many types of annuities with a variety of features, but PERA, through its partner Empower, is able to offer two types of annuities for participants in the PERAPlus 401(k), 457 and DC plans: A single premium fixed immediate annuity and Qualified Longevity Annuity Contracts (QLACs).



<h3 class="wp-block-heading" id="single-premium-fixed-immediate-annuity">Single premium fixed immediate annuity</h3>



Empower’s parent company Great-West Life &amp; and Annuity Insurance Company offers a <a href="https://www.copera.org/pera-offering-new-lifetime-income-options-to-dc-plan-participants" target="_blank" rel="noreferrer noopener" class="broken_link">single premium fixed immediate annuity</a> through the PERAdvantage Capital Preservation Fund within the PERAPlus 401(k)/457 and DC plans. This allows participants to use all or a portion of their account balance to make a one-time purchase that immediately converts to guaranteed payments. The participant can choose the frequency of the payments as well as how long they’ll continue.



This annuity can be a good option for plan participants who are entering retirement and are ready to start receiving income right away.



<h3 class="wp-block-heading" id="qlac-marketplace">QLAC marketplace</h3>



Plan participants who want to wait until later in retirement to begin collecting payments can take advantage of the <a href="https://www.blueprintincome.com/copera/" target="_blank" rel="noreferrer noopener">Qualified Longevity Annuity Contract (QLAC) marketplace</a> offered by Blueprint Income.



While an immediate annuity provides income right away, a QLAC is a deferred annuity that is designed to begin providing income after age 72, and as late as 85. QLACs are exempt from IRS required minimum distribution (RMD) rules, so they can be a good option for retirees who wish to reduce their RMDs and taxes between the ages of 72 and 85.



Blueprint Income facilitates the rollover of the purchase amount from the participant’s retirement account into the annuity option the participant chooses.



Both annuity options provide retirees the ability to turn their savings into reliable income, and both offer joint annuity options, which can provide income to a surviving spouse. While an annuity might not be the right fit for everyone, it can be a helpful tool in planning for one’s golden years.



For more information on these annuity options, visit <a href="https://coperaplus.org" target="_blank" rel="noreferrer noopener">coperaplus.org</a>.

PERA Offering New Lifetime Income Options to DC Plan Participants

The PERAPlus 401(k)/457 plans and the Defined Contribution (DC) Plan — collectively known as Capital Accumulation Plans — have become an important part of PERA, with more than $5.5 billion invested as of Dec. 31, 2020.



There are some important changes coming to the CAPs in the coming months, including increased contribution limits and a new recordkeeper. Continue reading for an overview of these changes and what they mean for plan participants heading into 2022.



<h2 class="wp-block-heading">New contribution limits</h2>



Earlier this month, the Internal Revenue Service announced <a href="https://www.irs.gov/newsroom/irs-announces-401k-limit-increases-to-20500" target="_blank" rel="noreferrer noopener">updated contribution limits</a> for 401(k) and 457 plans for 2022. Participants will be able to contribute up to $20,500 into a 401(k) or 457 plan next year, up from $19,500 in 2020 and 2021.



The IRS said the catch-up contribution limit for participants who are 50 and over will remain unchanged at $6,500, making for a contribution limit of $27,000 in each type of plan for that age group.



<h2 class="wp-block-heading">PERAPlus and DC plans moving to Empower</h2>



In March, the PERA Board <a href="https://www.copera.org/what-to-know-about-peraplus-401k-457-dc-plans-in-2022" target="_blank" rel="noreferrer noopener" class="broken_link">selected Empower Retirement as the new recordkeeper</a> for the PERAPlus 401(k)/457 and DC plans, replacing Voya Financial. That transition will take place in late November and early December.



Greenwood Village-based Empower is one of the largest retirement providers in the country, with significant experience administering large public plans like PERA. The Board selected Empower based on its experience, customer service, mobile-friendly technology tools, and its modern approach to communicating with members.



With the transition to Empower, plan participants will have access to:



<ul>
<li>Expanded call center hours</li>



<li>A robust technology platform, including Empower’s website and mobile app</li>



<li>Financial wellness tools</li>



<li>Retirement planning tools, including personalized, one-on-one financial advice at no additional cost</li>
</ul>



The PERAdvantage funds available for investments in the 401(k)/457 and DC plans will not change — account balances will transfer to the same funds within Empower.



For more information on the Empower transition, including key dates, fees and more, visit <a href="http://coperaplus.org" target="_blank" rel="noreferrer noopener">coperaplus.org</a>.

What to Know About PERAPlus 401(k)/457, DC Plans in 2022

For the first time, PERA members have amassed $1 billion in savings in PERAPlus 457 accounts. The account plays a unique role in the world of retirement planning. For those in PERA’s DB plan, a 457 plan can serve as a source of flexible savings.



The 457’s Place in the Savings Universe



A 457 plan is a type of tax-advantaged retirement plan (like a 401(k), 403(b), etc.) that is primarily reserved for government employees. Jeffrey Cable, the Defined Contribution Manager at PERA, says changes in federal law over the last 15 years have minimized the number of differences among these types of accounts, which can make them seem indistinguishable. But one key difference remains, and it’s significant.



Whereas in most retirement accounts you must reach a certain age before making penalty-free withdrawals, the 457 allows a person to take penalty-free distributions immediately upon leaving the person’s job.



What a 457 Looks Like in Practice



Say a person starts a position at a PERA-covered employer at age 25 and saves $1,000 each year. That person is able to invest those dollars in the same <a href="https://copera401k.voya.com/einfo/fundinfo.aspx?cl=CORADO&amp;pl=650301PU&amp;page=investment_informationfundperformance&amp;s=&amp;d=139350e7368e378d6f4496c683ba94fa190f1047" target="_blank" rel="noreferrer noopener" class="broken_link">PERAPlus funds</a> available to participants of PERA’s 401(k).



Between savings and investment gains, imagine that person leaves employment at age 35 with $15,000 in their 457 ($1,000 annual savings x 10 years, plus $5,000 in gains from investments). That person is able to access these funds at age 35 without the tax penalty.



If those same funds were instead in a 401(k), distribution of the funds would be penalized by the IRS in the form of additional taxes until that person turned 59.5.



Taking Advantage of the 457



The lack of age restrictions can add flexibility to financial planning, Cable said. Although 457 savings are retirement savings, the ability to withdraw them before retirement can allow those funds to serve double duty–a backup emergency fund, for example. “It can be perfect for young people who may or may not have a full career in their current role,” he said.



PERAPlus 457 Facts and Figures



Administered by PERA since: 2009



Number of PERA participants as of December 31, 2019: 18,919



Available to: Every PERA employer can offer the 457 to employees, though not every employer has enrolled in the program.



Tax advantages: You make contributions to a 457 account on a pre-tax basis; then you pay taxes when you take distributions in the future. Some employers offer a <a href="https://peraontheissues.com/colorado-pera-launches-roth-option-for-peraplus-401k-and-457-plan-participants/" target="_blank" rel="noreferrer noopener">Roth 457</a> option as well. In that case, you may choose to also make tax-paid contributions, and qualified distributions are tax free.



The maximum amount you can save in a 457 plan in calendar year 2020 is $19,500. This is not a coordinating limit—you may contribute the maximum to a 457 and a 401(k) this year. If you are 50 or older, you may contribute up to $26,000 in each plan—or, if you are in your last three years before retirement, you may be eligible to contribute even more.



However, few members hit that max. In fact, most PERA members with a 457 account contribute between $1 and $416 each month. Here’s the breakdown:



<figure class="wp-block-table"><table><tbody><tr><td class="has-text-align-center" data-align="center">Annual contributions</td><td class="has-text-align-center" data-align="center">Number of PERA participants</td></tr><tr><td class="has-text-align-center" data-align="center">$0-$5,000</td><td class="has-text-align-center" data-align="center">7,237</td></tr><tr><td class="has-text-align-center" data-align="center">$5,001-$10,000</td><td class="has-text-align-center" data-align="center">1,151</td></tr><tr><td class="has-text-align-center" data-align="center">$10,001-$15,000</td><td class="has-text-align-center" data-align="center">530</td></tr><tr><td class="has-text-align-center" data-align="center">$15,000+</td><td class="has-text-align-center" data-align="center">1,614</td></tr></tbody></table></figure>

Tag Archives:

Updated Tax Brackets, Contribution Limits, Other Changes for 2024

PERA Offering New Lifetime Income Options to DC Plan Participants

What to Know About PERAPlus 401(k)/457, DC Plans in 2022

PERAPlus 457 Plan Reaches $1 Billion Milestone

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