When President Biden signed the $1.7 trillion spending bill Thursday, headlines focused on the fact that the measure will pay government operating expenses through next fall. However, a more lasting effect will be how it impacts your retirement funding.
The new law makes it easier for employers to help employees save money and repay student loans. Plus, it will open retirement plans to more part-time workers. More about those things later.
Roth Versus Other Retirement Plans
There are more tax-advantaged retirement saving opportunities for holders of Roth Individual Retirement Accounts (IRAs) and Roth 401(k) plans in the measure.
Traditional IRA or 401(k) accounts do not collect taxes on contributions at the time they are made. However, taxes are paid when funds are withdrawn. Ideally, you are making your withdrawals in retirement, when your tax rate is lower.
Conversely, Roth retirement plans require you to pay taxes as you make contributions to the plan. However, when you make your withdrawals in retirement, you usually do not have to pay taxes on the earnings.
You can find details on IRA contributions in IRS Publication 590-A.
You may be able to open a Roth IRA through your bank. Brokerages also offer Roth accounts.
Changes In New Law
As of the tax year 2022, there are no requirements for you to ever withdraw money from your Roth IRA. However, you still can not take it with you. Your heirs will acquire your account upon your death and, generally, will have to begin taking distributions from it. Conventional IRAs require you to take distributions at age 72. The old rules said you had to begin withdrawals at 70 ½.
Roth 401(k)s currently play by the same required minimum distribution (RMD) rules as other 401(k)s and traditional IRAs. However, thanks to the new law, that changes in 2024. At that time Roth 401(k)s will operate under the same distribution requirements as Roth IRAs.
Employer Match
Most people with a 401(k) know their employer can match employee contributions to their plan. However, if you have a Roth 401(k), your employer can only put matching funds in a traditional 401(k). That changes with the new law. Employers will be able (not required) to put the match into a Roth 401(k).
Catch-up Contributions
If you are 50 or older, you can put more in your retirement account than younger workers. The idea is to let you make up for your misspent youth.
However, the new law has a catch for high-income workers. Conventional employer-sponsored retirement accounts make those catch-up contributions tax-deferred. As a result, high-income earners can derive a huge tax benefit.
The new law requires people with over $145,000 in earnings to put those catch-up contributions into a Roth 401(k) instead of a conventional 401(k). That means taxes will be paid before the contribution is made.
529 College Savings Account Change
Under a 529 plan, parents can put money aside for a child’s college expenses and let it grow tax-free.
Sounds great, right? But what if your child turns out to be a slacker who doesn’t go to or finish college like Steve Jobs, Bill Gates, Russel Simmons, or Richard Branson? That used to mean you could be stuck with additional taxes and penalties on withdrawals.
However, the new law offers you the chance to transfer unused 529 funds into a Roth IRA for your child (like Bill Gates needs a retirement account). Provisions of the new law, which take effect in 2024, say 529 funds can not go into a parent’s Roth IRA if the parent owns the 529 account. However, under existing law, the beneficiary can be changed, according to Saving For College.
Other restrictions include: the 529 account has to have been open for 15 years or more; lifetime transfers are limited to $35,000; rollovers can not exceed annual Roth IRA limits; contributions and earnings in the last five years can not be rolled over.
In addition, changing the beneficiary on a 529 account may require you to wait another 15 years before rolling over funds.
Changes In Employee Benefits
In addition to changes in individual retirement plans, the new law ushers in changes to employer-sponsored retirement plans.
Starting in 2025, most employers will be required to automatically enroll their workforce in 401(k) plans. Currently, almost half of working Americans do not have access to an employer-sponsored retirement plan, according to an AARP report.
In addition to retirement plans, the new law provides for employers to offer workers a payroll deduct savings account. Under this provision, employees could put up to $2,500 in an emergency savings fund. The contributions would be after tax. As a result, withdrawals would be tax-free.
Only about 40 percent of Americans can cover a $1,000 emergency expense, according to findings by Bankrate.
The new law also combines retirement savings with retiring student loan debt.
Starting in 2024, student loan payments qualify for an employer match in your retirement account. This provision was instituted because of the concern that paying on a student loan hampered workers’ efforts to fund their retirement.
A Fidelity Investment study found that almost 80 percent of respondents said paying their student loan came at the sacrifice of retirement savings.
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