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Changes Coming to Roth Accounts

Faith & Finance with Rob West | Jan 31, 2023

Show Notes

While many have legitimate concerns about the recently passed $1.7 trillion Omnibus bill, it certainly has a few silver linings for retirement accounts. The new legislation is a definite win for retirement savers with a 401k, 403b, or Roth IRA. We’ll talk about it today on Faith and Finance.

  • We recently talked about how the new spending package passed by Congress contains an important provision for folks with unused money in 529 education savings accounts.
  • 529 money has to be spent on qualified education expenses, and that’s always been a sticking point for folks who want to save for their kids’ education. If there’s money left over or the child decides not to attend college, the 529 plan holder was stuck. Spending it on anything but education draws a 10% penalty.
    But starting in 2024, up to $35,000 of that money can be rolled into a Roth IRA, if it’s been in the account for 15 years. The rollover can only be made to the beneficiary’s Roth IRA— not the owner’s. And changing beneficiaries may restart the 15 waiting period. Still, it’s a big win— getting around the 10% penalty.
  • But the legislation has several more wins for retirement savers. It enables employers to help workers save for emergencies; helps workers repay student loan debt and makes retirement plans more accessible to part-time workers.
  • But folks with a Roth account may get the biggest win coming out of the legislation, whether it’s a Roth IRA or Roth 401k. If you’re new to investing, here’s how these plans work …
  • Money contributed to Roth accounts is taxed differently from conventional employer accounts like 401k’s and 403b’s.
  • With those accounts, contributions are made with so-called “pre-tax” money. You get a deduction on your tax form that year. But when you retire and withdraw that money, it’s taxed as regular income based on whatever tax bracket you’re in at the time.
  • With Roth accounts, your contributions are taxed going in. You get no deduction for that money when you file your taxes that year. But when you withdraw that money later in life, presumably when your income is higher and you’re in a higher tax bracket, you don’t have to pay taxes on it.
  • There are income restrictions that prevent higher earners from opening Roth accounts (and other rules to follow) but for the majority of folks, Roth accounts are very attractive.
  • And there are actually two types of Roth accounts. One is the Roth IRA, and you can set one up on your own with any brokerage account like Fidelity or Schwab. Then there’s the Roth 401k that your employer can offer.
  • Now, since money going into a Roth IRA is already taxed — in other words, Uncle Sam got his share upfront — those account holders don’t have to start withdrawing that money when they reach age 72. They’re not subject to Required Minimum Distributions and they can just let the money grow.
  • But that hasn’t been the case with Roth 401ks. They were subject to the same rules as a conventional 401k. Account holders have been required to begin taking minimum distributions at age 72. The new legislation wipes out that requirement for Roth 401k’s starting in 2024, which is another big win for retirement investors.
  • Another win involves matching contributions. Employers can offer them to Roth 401ks just like with regular 401ks. Right now, employer matching contributions to Roth 401k’s have to go into the employee’s regular 401k account and be subject to taxes in retirement.
  • But the new legislation will allow employers to put their matching contributions into an employee’s Roth or conventional 401k. Why is that a win?
  • Remember that the benefit of a Roth account is that you pay taxes on contributions when your income is probably lower — and so is your tax rate. Then, later in life when you’re earning more and probably in a higher tax bracket, no taxes are due on withdrawals. The more money that goes into the Roth side of a 401k, the better off you’re likely to be, and the legislation allows for that.
  • Okay, there’s one more important change, but it only involves higher earners. For 2023, if you’re age 50 or older, you can put an extra $7,500 into your 401k without paying taxes on it.
  • But once the new legislation goes into effect, those earning more than $145,000 will have to put their catch-up contributions into a Roth 401k and pay taxes on it going in. Whether that’s a win or a loss will depend on the tax bracket you’re in when you retire.
  • So some big changes are coming in 2024.
  • We hope this information helps you make wise decisions about your retirement savings. Psalm 27:23 tells us, Know well the condition of your flocks, and give attention to your herds.”

On this program, Rob also answers listener questions:

  • What is better, a weekly or a monthly budget?
  • Does it make sense to pull money out of investments to delay drawing Social Security?

Remember, you can call in to ask your questions most days at (800) 525-7000. Also, visit our website at FaithFi.com where you can join the FaithFi Community, and even download the free FaithFi app.

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