Not much has changed with 401(k)s in the last couple of years until now. At the end of 2022, Congress passed the Consolidated Appropriations Act, which contains a number of changes to retirement plans. Some will phase in over the next few years and others start next year. Here’s a rundown of some of the major changes.
Currently 401(k) participants age 50 and older can contribute an additional $7,500 on top of their regular $22,500 salary deferral. Kudos to you if you are already maxing out your contributions. However, starting in 2024, catch up contributions for participants earning more than $145,000 will have to be made to a Roth, or on an after-tax basis.
For higher income participants, that will likely mean smaller tax deductions at the end of each year. We like Roth 401(k) contributions for many clients. Unfortunately, this change will impact higher income participants in particular. Most people who are maxing out their contributions tend to be high earners. If this is you, you’re also probably in a high tax bracket. Or, you could also be in your highest earning years, e.g., in your 50’s or early 60’s. If your kids are out of college, these are often the high savings years when participants are trying to shovel money into 401(k)s for retirement. The Roth catch-up requirement will likely increase taxes in the short term for these savers.
Long-term, part-time employees
The SECURE Act required these employees to be able to participate in their company’s retirement plan after completing three years of service. The new Act has reduced the work requirement from three to two years. For the large population of part-time workers, this is great news. If you are married and working part-time, this may provide your family with another important opportunity to save for retirement while lowering your taxable income at the same time.
Student loan debt
Starting in 2024 under the new rule, student loan payments can count as retirement contributions for the purpose of qualifying for matching contributions in a 401(k). As many with student loans now, making contributions to a 401(k) when one has large student loan balances is nearly impossible. These company matching contributions will help those participants who are unable to contribute build their retirement accounts while paying off their loans.
Required minimum distributions (RMDs) pushed out
This year the age at which RMDs must begin is now 73. In 2033 it will be pushed out further to age 75. While that may help those who want to defer taking their RMDs, it will likely mean that when they actually do start taking their RMDs, the amounts will be larger, due to additional years of deferral and potential account appreciation.
In addition to the age changes, the penalty for not taking an RMD when required is reduced from 50% to 25% (in some cases, to 10%). The high penalty was painful to some retirees who inadvertently missed their required start dates. These seem like more reasonable penalties for retirees. Separately, pre-death RMDs for Roth 401(k)s will be eliminated starting in 2024.
Participants will be able to withdraw up to $1,000 per year from their retirement savings account for emergency purposes without having to pay the 10% penalty tax on early withdrawals which applies if you are under age 59½. The law also allows employees to set up an emergency savings account through payroll deduction with a limit of $2,500 per year.
There are a number of other provisions of the Consolidated Appropriations Act but these are the ones that I think are most relevant to our readers.
If you have questions about these changes to retirement plans, give me a call. I’m here to help. You can schedule a quick call with me by clicking HERE.
Lyman H. Jackson
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