Congress recently passed a sweeping set of retirement plan rules in a bill called the SECURE 2.0 Act. These new rules look to expand the use of Roth accounts, no doubt to accelerate the timing of tax payments, and make it easier for some to save for retirement. They are worth understanding because some of them could meaningfully impact your financial future.
Here are some of the most important new rules and who they are designed to benefit.
More Roth for younger savers
Probably the most significant new rule will allow employees to direct all future employer contributions (i.e. matching or profit sharing) into a Roth account. This new rule could make a huge difference in your ability to afford to retire.
While paying taxes on employer contributions up front will reduce your take home pay today, the reward is a lifetime of tax-free investment earnings. The younger you are, the more your investment earnings compound and the larger the tax benefit becomes.
Spoiler alert, the final regulations detailing exactly how employer contributions can go into your Roth account are still pending. You will have to wait until the second half of the year to take advantage of this option, assuming your employer decides to make this new retirement plan election available.
College savers
Another new rule should encourage more parents to invest for their children’s education by allowing the tax-free transfer of unused 529 college savings assets into a Roth IRA for the child. To qualify for a transfer, the 529 account must have been open for at least 15 years, your child must have at least as much earned income as the amount being transferred during the year, and the amount transferred cannot exceed the annual contribution limit, currently $6,500.
Those over 50
If you are over 50, be aware the rules pertaining to “catch-up” contributions are changing. The current rule allows those over 50 to contribute up to $7,500 additional dollars above the maximum allowable annual contribution. The max this year is $22,500.
Starting next year, highly compensated individuals, those earning over $145,000, will be required to make their catch-up contributions into a Roth account. Starting in 2025, those attaining the age of 60 -63 will be allowed to make inflated catch-up contributions of up to $10,000 or 150% of the then maximum, whichever is greater.
Those over 70
Assets you accumulate in a Roth 401(k) or 403(b) account are no longer subject to required minimum distributions (RMDs). This means you can hold Roth assets accumulated in your employer’s plan indefinitely. The new rules also push higher by one year, from 72 to 73, the age at which you must start taking RMDs from a traditional pre-tax account. In 2033, the age will be pushed even higher to 75.
Those with student loans and new retirement plans
One of the more interesting new rules allows employers to match an employee’s student loan payment with a contribution to their 401(k) or 403(b) retirement account. This is a program a handful of large employers initiated over four years ago which lawmakers apparently liked enough to now make it available to everyone. By voluntarily adopting this rule, an employer can make it clear they understand the difficulty some recent college grads have saving for retirement given the amount of student debt hanging over their heads.
