Do you want to receive a post-tax employee match in your Roth 401(k) or move funds from a 529 plan to a Roth Individual Retirement Account? Hopefully, you’ll have some good fortune.
Within the next few days, President Biden is expected to sign the $1.7 trillion federal spending bill. Includes numerous amendments to retirement plans. Making it more straightforward for businesses to provide financial aid for employees to set up savings accounts, help with the repayment of student loans, and expand retirement plan eligibility to part-time workers.
However, those interested in “Roth” accounts will likely find the most nuggets of interest: The possibility of transferring funds from a 529 college savings account to a Roth I.R.A. is an interesting new feature of Roth I.R.A.s and Roth 401(k)s.
Information and clarification on the Roth provisions follow below.
The basics of Roth IRAs
How investors in Roth IRAs pay income taxes sets them apart from those who contribute to traditional workplace retirement plans like 401(k)s and 403(bs) and traditional I.R.As.
You can defer some of your taxable income by putting money into a non-Roth account. Taxes on withdrawals are typically paid later, based on your payment at the withdrawal time.
For Roth accounts, the money you put in is subject to income tax the same year it’s deposited. Taxes are typically not due on the account’s earnings until withdrawal. Some restrictions on depositor income may apply, and you must follow specific procedures to avoid fines and taxes. More information can be found in IRS Publication 590-A.
There are various flavors of Roths available. The first is the Individual Retirement Account, which any investor can establish through a brokerage account. The Roth 401(k) is another option companies can provide for their staff.
Changes to Roth 401(k)s
Unlike traditional Individual Retirement Accounts (IRAs), 2022 Roth IRAs do not require you to begin taking distributions once you reach the age of 72. If you don’t plan to withdraw your Roth funds for a while, you can let the entire balance grow tax-free.
With a Roth 401(k), the withdrawal schedule is the same as with a traditional 401(k), but the rule is different (k). As of 2024, however, the new legislation would subject Roth 401(k)s to the same regulation as Roth I.R.As.
The exact matching contributions that are offered to traditional 401(k) plans can be made to Roth 401(k) plans by employers. However, a Roth 401(k) match must be deposited into a traditional 401(k) account before taxes are deducted. Under the new regulation, companies can offer their workers the option of contributing their company match to a Roth 401(k) instead of a traditional one. As soon as the bill is signed into law, this provision will go into effect.
One benefit of a Roth IRA is that contributions can be made when your income tax rate is lower, such as when you are younger and have a smaller salary. It’s possible to withdraw a large portion of your earnings tax-free decades later when your tax rate is likely higher.
Investment options, including Roth 401(k)s and catch-up contributions
With the current retirement account rules, those who are 50 or older (at the end of a calendar year) can save more for retirement than the standard annual contribution limits. Those who worry they haven’t saved enough but have some extra cash can now play catch-up.
Currently, catch-up contributions to workplace retirement accounts like 401(k)s are eligible for tax deferral treatment, meaning the money can be saved for retirement without having to front any additional cash. After the new law is signed, however, those who make over $145,000 will be required to start contributing to a Roth 401(k) with their catch-up contributions beginning in 2024, which will need them to pay income taxes on the money.