What you need to know about Privacy Act 2.0: 401(k) and IRA changes

Saving for retirement just got a little easier. Congress has passed major changes that could help 401(k) and IRA savers save a little more money for their future.

A series of new laws—collectively known as the Privacy Act 2.0—will Changing the way Americans save for retirement starting in 2023. They are part of a $1.7 trillion spending bill that Congress passed late last week and include raising the required minimum distribution age (RMD), allowing unused 529 funds to use (a tax-advantaged savings plan for college expenses) switch to a retirement account penalty-free, and make it Easier for workers with student loans to save for retirement.

“With the passage of SECURE 2.0, millions more Americans now have a better chance of succeeding in retirement,” said John James, head of Vanguard Institutional Investor Group. “This landmark law makes it easier for participants to save for their future.”

The bill includes dozens of changes to retirement savings, according to the bill’s text, summarizing terms and insights from financial and retirement experts. Below is a summary list of some of the key 401(k), 403(b) and IRA adjustments.

Changes to RMD

Currently, taxpayers are required to start receiving RMDs from their retirement accounts at age 72. But starting in 2023, that age will increase to 73. In 2033, that age increases to 75.

That means if you turn 72 in 2022, you’ll need to get your first RMD by April 1, 2023; but if you turn 72 in 2023, you don’t need to withdraw your RMD until next year, when you turn 73. That will move your first withdrawal deadline to April 1st. 2025 (because your first RMD will be for 2024 ).

An additional RMD change: Penalties for missing RMDs are being reduced from 50% of withdrawals to 25%. It drops to 10% if the RMD is done by the end of next year.

And starting in 2024, the surviving spouse who inherits the retirement account will be treated as the deceased account holder for RMD purposes. This means that if the surviving spouse is younger than their deceased partner, they can delay RMDs.

Finally, although there are currently no RMDs on Roth IRAs, there are distributions required for Roth 401(k)s. Privacy Act 2.0 removes these for account holders who are still alive.

Increase catch-up contributions

Another perk for older workers: They’ll be allowed to save more in a retirement account.

Currently, people over 50 can invest an additional $7,500 in their 401(k) or 403(b) fund for offsetting contributions. That amount will increase to $10,000 starting in 2025 for 60- to 63-year-olds.

Additionally, starting in 2024, the IRA’s catch-up limit will be increased by inflation each year. Currently, that’s a fixed $1,000 per year bonus.

Catch up on Roth .’s contributions

Under current law, offsetting contributions to qualified retirement plans can be made on a pre-tax or Roth (after-tax) basis. Law changes for higher earners: For those earning at least $145,000, all offset contributions are subject to Roth tax, starting in 2024.

Ed Slott, a CPA and a CPA, said: “Congress wants more retirement funds to go into Roth-style accounts because they increase tax revenue, as there is no tax deduction on contributions. Roth’s contribution. IRA expert. “But this is great for everyone because Roth distributions in retirement will be tax-free.”

Combined Roth 401(k)

Under current law, if an employer offers a retirement match, it needs to be distributed into a traditional 401(k) on a pre-tax basis, even if the employee has a Roth 401(k). The new law governs this so that employers can offer Roth matching contributions. Like other Roth contributions, employees pay upfront tax on their respective Roth and can later withdraw tax-free.

401(k) savings account

Employers will now be able to automatically enroll their employees in savings accounts linked to their 401(k)s. Studies have shown that auto-enrollment increases participation—and total money—savings. They can also match emergency savings, although the match would be in the form of retirement account contributions.

Employees earning less than $150,000 starting in 2023 are eligible for these accounts and can save up to $2,500. The savings work like a Roth contribution (or a regular savings account contribution): Employees contribute an amount they already paid taxes on and can withdraw it without paying taxes. If an employee meets that $2,500 limit, any additional contributions will be transferred to the Roth account.

“The SAFETY Act is more focused on emergency savings than any previous law we’ve seen,” said Jeff Kobs, head of the John Hancock Retirement Business Advisory Group. “The past few years have really emphasized that providing a way to save for emergencies can prevent individuals from having to use their long-term retirement assets to pay for short-term needs. term.”

401(k) and IRA . Emergency Withdrawals

The law will make it easier for workers to withdraw money from their retirement accounts without penalty in the event of a personal or family emergency such as a terminal illness or natural disaster.

One emergency distribution of up to $1,000 will be allowed each year starting in 2024. If taxpayers do not repay that $1,000 in three years, they cannot receive another distribution during that time. .

“While these are all important matters, early withdrawal from a retirement account should be a last resort, and now the Tax Code has more free access than ever before,” said Slott. ‘ said Slott. “It was a tough call. Hopefully people will only use these funds for real emergencies, plus they still owe distribution taxes.”

Additionally, starting in 2024, domestic violence survivors will be allowed to withdraw without penalty in amounts less than $10,000 or 50% of their retirement accounts. They can repay that amount within three years, and if so, they will get a refund of the income tax they paid on withdrawal.

401(k) automatic registration

Speaking of automatic enrollment, the law requires employers starting a new retirement plan in 2025 or later to automatically enroll their employees in 401(k) and 403(b) plans. . Automatic enrollment will start at 3% of the employee’s salary and cannot exceed 10%. Each year, the contribution will automatically increase by 1%.

Paying the right student loan

Workers with student debt often forgo contributing to their retirement accounts to afford monthly loan payments. And if their employer offers a 401(k) match, that means they’re missing out on that money—a pay cut and a reduction in the time they invest to effectively retire, sometimes. when in a decade or more.

The Privacy Act 2.0 allows employers make appropriate contributions to a retirement account for employees who are making student loan payments, even if they’re not contributing to their 401(k)s. The match would mirror a retirement match, allowing those borrowers to start saving for retirement while paying off their debt.

This also applies to people with 403(b)s, 457(b)s, and SIMPLE IRAs.

529 . fund reinvestment

If a family has money left in a 529 account that they are not using for educational purposes, they will be penalized for withdrawing that money. Starting in 2024, the Privacy Act 2.0 allows beneficiaries of 529 accounts to reinvest up to $35,000 (over a lifetime) into a Roth IRA. The 529 needs to be open for at least 15 years for the beneficiary to do this.

Rollover amounts are subject to annual Roth IRA contribution limits, so some people may need to plan to roll their money over several years.

“While there aren’t millions of people over-funding 529 plans, this assures parents and grandparents sponsoring 529s that the money can be re-located to their children and grandchildren to save money. retirement savings if their 529 beneficiary goes to a cheaper school, said Jamie Hopkins, managing partner of wealth solutions at the Carson Group.

National 401(k) registry

Ultimately, the measure would create a national lost and found registry for 401(k)s. Currently, states operate their own versions, leading to confusion for many workers.

“It is virtually impossible to find your money if it is lost or forgotten because the money may not be in the state you live in or your employer in, but where the program provider is located,” Hopkins said. speak. “A country category will benefit consumers.”

The database will be searchable online, allowing workers to search for their plan manager.

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