President Biden’s spending package contains increased access to retirement plans, new restrictions for 529 accounts, and matching payments for student loans.
In 2023, after a bad year for retirement savings, new legislation may make it slightly simpler to set away funds. The amendments, which were included in an omnibus funding measure signed by President Joe Biden at the end of December, have been criticized for only favoring high-income employees and not going far enough to solve the retirement issue in the United States.
But in the face of significant obstacles, such as a portion of the population with no retirement savings, it is a beginning.
Edward Renn, a lawyer on the international legal firm Withers’ private client and tax division, stated that some things are certainly improved, but at best, it’s a tune-up.
Here are a few of the changes that financial advisors and retirement specialists believe are the most pertinent and significant for retirement savers today:
Baird Private Wealth Management’s tax planning director Tim Steffen says that transferring funds from a 529 college savings plan to a Roth IRA is one of the most intriguing improvements. Roth accounts are financed with post-tax monies, which grow tax-free.
Beginning in 2024, beneficiaries having funds remaining in their 529 accounts, for example, because they received more scholarships than anticipated, would be able to roll those assets into a Roth IRA without incurring the standard 10% penalty for withdrawing funds for non-educational costs.
However, there’s a catch: The 529 account must be at least 15 years old, and account growth from the prior five years cannot be considered when transferring funds to a Roth. Contributions to Roth IRAs will remain at $6,500 in 2023, while the lifetime limit for 529 rollovers will remain at $35,000.
David Haas, the founder of Cereus Financial Advisors, stated that it is beneficial for parents who are hesitant to invest in a 529 plan since their child may not attend college. It certainly pushes college savings instead of retirement, but it’s wonderful.
Student Loan Match
Employers may recognize employee student loan payments as contributions to workplace retirement savings plans beginning in 2024. This allows them to qualify for matching contributions from their employers, offering a jump start to younger individuals who would otherwise delay retirement savings.
Student loan payments are now hiatus pending a Supreme Court review of Biden’s plan to write off as much as $20,000 in debt per borrower.
Today, employees who need to tap a 401(k) before age 59 ½ for an emergency need can take hardship withdrawals, but in most situations, will incur a 10% penalty, owe income tax, and won’t be able to repay the money into the account. These withdrawals have increased during the previous year or so.
Beginning in 2024, businesses will be permitted to provide emergency savings accounts alongside retirement plans to reduce these withdrawals.
The number of 401(k) investors making emergency withdrawals increased by 24% in the 12 months ending September 30, according to Empower Retirement.
These accounts can store up to $2,500. However, a lesser limit may be imposed by the employer. An employee is permitted one penalty-free withdrawal of up to $1,000 yearly, which must be repaid within three years. No further payouts are permitted if the money is not repaid within the three-year term.
“The first topic plan sponsors will discuss the optional student loan provision, and this is the second,” said Dave Stinnett, Vanguard’s head of strategic retirement consulting. This is one of the simpler things to take if unemployment rises and general financial conditions become difficult.
Shai Akabas, a director of economic policy at the Bipartisan Policy Center, says people of all income levels struggle to cover even small emergency expenses.
“Even if you have a solid retirement account, it’s human nature not to have money saved for emergencies,” he added. People plunder their retirement accounts, which begin as a trickle and escalate, take out payday loans, or just cannot afford the expenditure.
Deeper in Debt Bottom
90% of US families by wealth saw a record increase in consumer debt between June 2021 and June 2022 due to unprecedented inflation.
The regulations governing so-called “catch-up” contributions — the amount over the yearly maximum that investors over age 50 can contribute to retirement accounts — have also been modified.
Older individuals can contribute $7,500 beyond the $22,500 annual maximum to 401(k)s. In 2024, participants aged 60 to 63 who participate in plans that include catch-up contributions may contribute over $10,000 or 50 percent more than the standard catch-up amount. (This amount would be $11,250 if the provision were implemented in 2023.)
Current legislation permits catch-up contributions to be divided between traditional 401(k) accounts and Roth accounts. In 2024, however, employees earning $145,000 or more will be required to make catch-up payments to a Roth, preventing them from reducing their taxed income.
While high-income investors may lament the loss of this tax haven, Vanguard’s Stinnett warns against overreacting. We often associate diversity with stocks, bonds, and cash, but tax diversification also exists. A combination of tax-deferred and after-tax accounts provides retirement income withdrawal flexibility for savers.
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