Last week Congress passed – and the President signed – the Consolidated Appropriations Act of 2023 (pdf). This is the huge omnibus spending bill that funds the government, but also includes many changes to retirement accounts that were originally knows as the Secure Act 2.0. Jeffrey Levine does his usual wonderful, incredibly in-depth job of describing those changes in this article. But since the bulk of those changes are in the weeds and only applicable to a small number of folks, I wanted to pull out the ones that I thought would be the most relevant to the most people.
Age for Required Minimum Distributions: As I mentioned in my post earlier this week, the age where you have to start taking Required Minimum Distributions has been increased again.
So for anyone not yet taking RMDs, they will being at age 73 if you were born before 1960 or 75 if you were born after. This will primarily benefit wealthier folks who will have an extra few years to possibly do Roth conversions.
Elimination of Roth RMDs for Employer-Sponsored Plans: Currently, Roth accounts held in employer-sponsored plans (401k/403b/457) are subject to RMDs just like traditional, pre-tax accounts (and unlike Roth IRAs). This eliminates those RMDs beginning in 2024. (Note: It appears to eliminate them even for folks who are already old enough and currently required to take RMDs.)
Previously it made sense for almost everyone to roll over any Roth accounts they had through their employer to a Roth IRA just to avoid the RMDs. It still makes sense for many folks to do this because of lower fees and better investment choices, but if you have a good, low-cost employer-sponsored plan, you may want to leave your Roth there.
Employer Match into Roth Accounts: Currently, any employer match you receive for contributions to employer-sponsored plans (401k/403b/457) has to go into a traditional, pre-tax account, even if your contributions are going into the Roth version. Effective immediately, employers are now allowed to make those contributions to your Roth account if you choose. Note that those contributions would be considered income for the current year.
High Wage Earner Catch-Up Contributions Must Be Roth: This won’t apply to many folks who read this blog, but folks with wages in excess of $145,000 a year will only be able to make any catch-up contributions (post age-50 additional contributions) into their Roth account. The rules are complicated (of course), and also don’t apply if your employer doesn’t offer a Roth version of the account.
529 to Roth IRA Conversions: One of the more controversial and most-talked about provisions is the new ability to make limited conversions of money from a 529 account to a Roth IRA (beginning in 2024). Because there was concern about wealthy people using this as (another) backdoor way to make even more contributions, there are quite a few rules surrounding this that try to ameliorate that possibility.
- The Roth IRA receiving the funds must be in the name of the beneficiary of the 529 plan.
- The 529 plan must have been maintained for 15 years or longer.
- Any contributions to the 529 plan within the last 5 years (and the earnings on those contributions) are ineligible to be moved to a Roth IRA.
- The annual limit for how much can be moved from a 529 plan to a Roth IRA is the IRA contribution limit for the year, less any “regular” traditional IRA or Roth IRA contributions that are made for the year.
- The maximum amount that can be moved from a 529 plan to a Roth IRA during an individual’s lifetime is $35,000.
So, what does this really mean? It means for some folks (like myself) who’ve over-saved for college expenses (well, really, had much greater investment returns than anticipated), or for people who’ve contributed to a 529 plan and their child chooses not to pursue higher education, they will be able to transfer some of that “excess” into a Roth IRA for the beneficiary. For example, with the current (2023) yearly limit of $6,500 for IRAs, we will be able to max out our daughter’s IRA in the years 2024-2028 (with perhaps a little bit left over for 2029 depending on how the limit increases in the meantime) by transferring $6,500 per year from her 529. Importantly, that eliminates her ability to contribute the $6,500 herself (in other words, the 529 conversion takes the place of her yearly contribution).
In the end, it’s a nice new feature (in addition to all the existing options for how to use those funds) for folks who end up with “extra” in their 529 plans. For those who plan way ahead, it could also be a way to supercharge your child(ren)’s Roth IRAs. Because of the “account has to be maintained for 15 years” rule, someone could start a 529 at birth for a child and, when they turn 16, transfer the current yearly limit into a Roth IRA for them. T
he beauty of this is that it doesn’t require them to have earned income like a regular Roth IRA contribution. Update: While initial reports indicated they wouldn’t have to have earned income, subsequent reports indicate they do. Hopefully this will get clarified.
It’s also still unclear what happens when you change beneficiaries and, specifically, whether that restarts the clock on the 15-year rule. It seems like the intention would be that it should but, as written, it doesn’t specify that. Which means you could change the beneficiary to yourself and then contribute to your own Roth IRA. Even if it gets clarified that you then have to wait an additional 15 years, you could conceivably change the beneficiary, wait 15 years, and then make the conversions.
IRA Catch-Up Contributions Indexed to Inflation: Like employer-sponsored plans (401k/403b/457), IRAs have had a catch-up contribution for folks over age 50 where they can contribute more to their IRA (either traditional or Roth). Unlike employer-sponsored plans, however, this catch-up contribution was not indexed to inflation, so has been “stuck” at $1,000 since 2006. Effective in 2024, this catch-up contribution will also be indexed to inflation (with increases in $100 increments). While this still doesn’t level the playing field with employer-sponsored plans (because of the much lower contribution limit), it’s at least a start.
Increased Catch-Up Contributions for Employer-Sponsored Plans: Beginning in 2025, participants in employer-sponsored plans (401k/403b/457) who are ages 60-63 will get a larger catch-up contribution amount. The amount will be the greater of 150% of the current regular (post-age-50) catch-up contribution or $10,000 indexed for inflation.
In practice, this is likely to mean that when this goes into effect in 2025, the catch-up limit for those aged 60-63 will be 150% of the current catch-up contribution (because it will likely be more than $10,000) but, eventually, the inflation indexing on the $10,000 amount will likely surpass the 150% threshold and provide a higher catch-up amount. For example, if the regular catch-up contribution in 2025 is $8,500, then 150% of that will be $12,750, which is greater than the $10,000 minimum that hasn’t had any inflation adjustment yet.
Reduction in RMD Penalties: Effective in 2023, the penalty for not taking your full RMD decreases from 50% to 25% and, if you correct it within the “correction window”, it falls even further to 10%.
Student Debt Payment Matching: Beginning in 2024, employers will be able to “match” their employees student debt payment in lieu of 401k/403b/457 contributions, with the employer match still going into the qualified retirement account. This is designed to help younger (typically) employees who have been losing out on employer matches because they have had to make student debt payments instead of contributing to their 401k/403b/457 plan.
As always, taxes are complicated, so please don’t consider anything above to be tax advice. But hopefully this gives you a few ideas of the changes and perhaps some ways you can take advantage of them.