When our nation’s lawmakers updated the retirement rules in late 2022, they “tilted the table” a bit toward Roth Individual Retirement Accounts (IRA), providing several updates that make them more accessible to individual investors.
The new, enhanced Roth rules caught many by surprise because during much of 2021, the Senate Finance committee and the House Ways and Means committee were looking for ways to apply restrictions to Roth accounts. That caused some to hesitate with any Roth decisions.1
“… But seek first His kingdom and His righteousness, and all these things will be given to you as well. …” Matthew 6:25-34
When we assess a retirement strategy, we want to review all of your existing investment accounts to make certain they are working together to pursue your goals based on your time horizon. If a Roth IRA makes sense, we would discuss the features and limitations of the accounts, explaining that rules can change at any time
Here’s a quick rundown of the key changes to Roth Accounts.2
529 Plans to Roth Accounts
The new rule, which goes into effect in 2024, allows a 529 account holder to rollover money to a Roth IRA account under certain conditions. Currently, money from a 529 that is used for non-educational expenses can be subject to penalties and taxes.3
The main benefit with this new rule is that it removes some of the uncertainty that can happen if your kids don’t need the 529 money or you overfunded the account. There are some limits that go along with the updated rules, so it’s best to speak with us to see if this might apply to your situation. OR, our planning department can help and provide a TAX ANALYSIS!
Roth 401(k) and Roth 403(b)
Today, Roth IRAs do not require withdrawals until after the death of the owner. But Roth accounts like 401(k)s and 401(b)s are subject to required minimum distributions. All that changes in 2024. The old rule caused some Roth 401(k)s and Roth 403(b)s to rollover into a Roth account to avoid required minimum distributions. After 2024, the rules will be consistent for all Roth accounts.4
SIMPLE and SEP Roth IRAs
Starting in 2023, Savings Incentive Match Plans for Employees (SIMPLE) plans can accept Roth employee contributions, and Simplified Employee Pension (SEP) IRAs can offer employees the ability to place SEP contributions into a Roth account.4
Roth Employer Matching
Also starting in 2023, the new rule allows employers to let participants in 401(k)s and 403(b)s to get matching contributions on a Roth format. (The rule also applies to 457(b) plans for government employees.)3
The more Roth accounts get woven into the fabric of personal finances, the more difficult it will be for lawmakers to make broad changes. If you were considering a move but held off due to legislative concerns, please let us know. We may have some additional resources that can help you decide.
- CNBC.com, November 4, 2021
- Roth IRA distributions must meet a five-year holding period and occur after age 59½ to qualify for the tax-free and penalty-free withdrawal of earnings. In certain other circumstances, tax-free and penalty-free withdrawals can also be taken, such as the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.
- Forbes.com, December 22, 2022
- Forbes.com, January 5, 2023