How the new retirement plan rules can affect your financial future

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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.

Even though it costs more upfront, saving in a Roth account makes sense for many. Having counseled thousands of people nearing retirement, most find it profoundly advantageous to not have their savings subject to a significant, often between thirty and forty percent, haircut for state and federal income taxes.

Spoiler alert, the final regulations detailing exactly how employer contributions can go into your Roth account are still pending. You’ll 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 years old

If you’re over fifty years old, be aware the rules pertaining to “catch-up” contributions are changing. The current rule allows those over fifty 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 years old

For those not planning to spend their retirement savings right away, the new rules allow you to keep your retirement assets sheltered from taxation longer. 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.

It’s well known that many close to retirement prefer to receive paper statements. Under a rule passed in 2020, employers were allowed to convert all paper statements to e-delivery and require participants request a paper statement. Under the new rule, employers are required to provide a paper statement at least annually, unless the participant specifically opts out.

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 law makers 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.

Thinking about starting a new company? Under the SECURE 2.0 Act all new 401(k) and 403(b) plans are required to include auto-enrollment. This should help boost future participation rates and get more employees saving for retirement at start-up companies.

All the rules described above will require significant behind-the-scenes set-up and administration as well as a large employee communication effort on the part of employers. Look for announcements from your employer in the coming weeks and months letting you know how your employer is going to handle these new rules. If you don’t hear anything, do yourself and your coworkers a favor and let Human Resources know you’re interested in them.

This column was also featured in the Milwaukee Journal Sentinel. The material provided is for informational purposes only. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Francis Investment Counsel does not offer personal tax or legal advice.