For a more in-depth review, check out the webinar recording from January 2023: Exploring the New Laws Surrounding Retirement and College Funding
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The initial Secure Act was passed in December of 2019, and if you remember, one of its biggest changes was permitting the use of up to $10,000 from a 529 savings plan to pay off student loans.
Congress built upon this by passing the Secure Act 2.0 with December’s omnibus bill. President Biden signed it into law on December 29, 2022. Here are the most sweeping changes that you should know:
1. You will be able to rollover over up to $35,000 from a 529 savings plan to a Roth IRA.
This is great news for families who prioritize saving in a tax-advantaged 529 savings plan. No one can predict the future. If your child decides not to go to college, gets a massive scholarship, or you overfund your 529 account, you have another option besides transferring the funds to another beneficiary or being penalized for withdrawing the funds.
From the bill itself comes a reassuring line: “Families who sacrifice and save in 529 accounts should not be punished with tax and penalty years later if the beneficiary has found an alternative way to pay for their education.”
What are the restrictions?
- The Roth IRA will still be subject to annual contribution limits, and the 529 account must have been open for at least 15 years.
- The Beneficiary of the 529 must be the beneficiary of the Roth.
This change will go into effect after December 31, 2023.
2. Student loan payments can now be matched by employers as retirement contributions.
Starting after December 31, 2023, this provision will hopefully ease the restrictive nature of student debt on graduates trying to save for the future.
3. Employers are now required to auto-enroll employees in 401k.
This provision will go into effect after December 31, 2024.
4. RMD Age Increased to 73 in 2023, 75 by 2033.
The penalty for not taking a required minimum distribution will also be lowered from 50% to 25% on the amount not distributed. This penalty can be reduced to 10% if the error is corrected “in a timely manner.” The penalty reductions are in effect right now.
5. Retirement catch-up contributions increased.
Currently, employees aged 50 and above can make catch-up contributions to a retirement plan beyond the annual federal limits ($20,500 in 2022). The limit on catch-up contributions for 2021 is $6,500 ($3000 for SIMPLE Plans).
The new rule allows those aged 60 – 63 the ability to contribute $10,000 or 50% above the annual limit in 2025 (whichever is higher). This provision takes effect for taxable years after December 31, 2024.
Restrictions: Starting after December 31, 2023, anyone with compensation over $145,000 must “Rothify” their catch-up contributions. This means you will be taxed on your contributions up-front, but the money will grow and can be withdrawn tax-free.
6. No-penalty emergency withdrawal permitted from retirement plans.
Typically, there’s a 10% penalty for early withdrawal of retirement funds. Plan participants are now allowed to withdraw up to $1000 in the case of emergency expenses. These funds will be subject to ordinary income tax and must be repaid within three years to qualify for a tax refund.
Those with a terminal illness do not have to pay the penalty.
The provision takes effect after December 31, 2023.
Restriction: You may only make an emergency withdrawal once per year. You must repay the withdrawal in the three-year time period in order to access another emergency withdrawal.
7. Employers can automatically set aside income in emergency savings for employees.
Employers can now offer their “non-highly compensated employees pension-linked emergency savings accounts.” Employers may also offer a match for these contributions.
This account essentially operates as a combined emergency savings-retirement account. Contributions are taxed up front like a Roth. The first four withdrawals from the account each plan year may not be subject to any fees or charges.
Restrictions: The contribution cap is $2500.
Begins after December 31, 2023.
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Check out the free webinar we offered on this topic.
Author:
The College Funding Coach Editorial Team
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