INVESTING | Sep 18, 2023

Retirement Plan Rules Have Changed, and More Changes Are Coming

In last week’s Roundup, Joseph included a *Wall Street Journal article *describing an important change for high-income 401(k) plan savers. It pertains to catch-up contributions — the $7,500 that savers ages 50 and older can add to the $22,500 that all savers can contribute to a 401(k) plan. Beginning next year, catch-up contributions made by those making more than $145,000 must be made on a Roth basis.

While some see that change as a benefit since it’ll give more people access to tax-free money in retirement, those impacted will need to budget for a higher current tax bill.

Here’s a look at a handful of the other 90-plus retirement-savings changes being ushered in by the Secure 2.0 Act, which Congress approved last December.

Required Minimum Distributions. This year, the age for beginning to take RMDs is raised to 73. Ten years from now, in 2033, it will rise to 75. However, anyone who became subject to RMDs under previous rules must stick to those rules.

In a related change, the penalty for missing an RMD is now 25% — down from 50%. If corrected in a “timely” manner (if you take the necessary RMD by the end of the second year following the year it was due), the penalty is further reduced to 10%.

Roth Accounts. If you contribute to a Roth workplace retirement plan and your employer provides a match, that matching money may also be made on a Roth basis. Previously, employer matches had to be on a pre-tax basis.

For the first time, Roth contributions also are now allowed for SEP and Simple IRAs.

RMDs and Roth Accounts. Beginning next year, Roth 401(k) account balances will no longer be subject to RMDs during the owner’s lifetime. Previously (and confusingly!), Roth IRA balances were not subject to RMDs but Roth 401(k) balances were. Starting in 2024, owners of either type of Roth won’t be forced into any distribution schedule.

QCD-Funded Annuities. RMDs are excluded from taxable income when used to make a charitable contribution. This is known as a qualified charitable distribution, or QCD. Now, for the first time, an additional benefit may be derived from such money. Up to $50,000 can be used for a one-time purchase of a charitable gift annuity. (For more details, read Joseph’s article in the July issue of the Sound Mind Investing newsletter: Give to Charity From Your IRA — and Get Retirement Income in Return.)

529 College-Savings Plans. Beginning next year, if money is left over in a 529 plan, up to $35,000 may be rolled into a Roth IRA in the beneficiary’s name. To be eligible, the plan must have been open for at least 15 years and the amount rolled over must adhere to the annual contribution limit — currently $6,500. If you want to move more than $6,500 from a 529 plan account to a Roth, you’ll have to do so in stages.

Which of these changes will impact you?

*Image used with permission. *

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