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New Retirement Planning Laws for 2024
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New Retirement Planning Laws for 2024
The Secure ACT 2.0, which passed in 2021, again changed the landscape for retirement plans after 2017’s Secure Act 1.0. Secure 2.0 passed many sweeping reforms, good and bad, that go into effect in the years between 2023 and 2026. This article is going to focus on the changes that take place in 2024 so that you are prepared on January 1, 2024. Keep in mind, however, that federal laws can be passed that are mandatory and some that allow 401k/403b plans new options, but the plan can choose to adopt or not adopt optional new rules. Therefore, make sure you talk to your company’s Employee Savings Plan to see if any of these new rules are available to you.
- Matching Student Loan Payments: After graduating college, many young employees are caught in a dilemma. They have significant student loan payments that devour a portion of their cash flow, leaving them missing out on the 401k matching contribution. Normally, employers will match 3% or more of the first 3-6% of the employees’ contribution into the company Employee Savings Plan, which is equivalent to a 3% raise just for putting 6% of your pay into the savings plan. Considering that the earlier you save for retirement the more likely you will be ready to retire at 65 is highly motivating to capture this 3% employer matching contribution in your retirement plan. The exception is for the person struggling to make student loan payments who does not have much excess cash flow to also contribute to the 401k. Secure Act 2.0 allows an employer to make the matching contribution into the 401k if the employee can show that they made equivalent qualified student debt repayments. Thus, the employee now will have captured the 3% pay raise via company match by merely continuing to fulfill their student debt repayment plan. This is a provision the employer must offer in their plan document; therefore, if this applies to you or your children, ask the 401k plan if the match for student debt repayment will be effective in their 2024 plan year. If not, then do not hesitate to let the employer know how disappointed you are in the plan not adopting this provision.
- Emergency Savings Funds: This provision has an A part and a B part. (The term “self-certifying” below is an honor system that the IRS has the right to challenge.) a. An employee may withdraw $1,000 one time per year without the 10% penalty. The term “emergency” will be self-certifying (with the above caveat) but is limited to true emergency needs. The employee has the opportunity over three years to place the funds back into the plan or an IRA without taxation. If the employee does not return the funds in the three-year timeframe, then the option for another $1,000 penalty-free withdrawal is limited to every three years. This is a federal provision, and the plan must adopt it. b. An employer may adopt an Emergency Savings Account (EMS) that is saved in an after-tax Roth account and is available for emergency requests monthly. The term emergency is much more open and is self-certifying (with the above caveat) but is more broadly available for unforeseen cash needs (further government clarification is due for these withdrawals). The only employees that may participate are non-highly compensated employees. The maximum annual contribution is $2,500 or a lesser amount chosen by the employer. The employer may auto-enroll all non-highly compensated employees (making less than $135,000) into the Emergency Savings Account at a rate up to 3% of their pay. Auto-enroll approaches use behavioral economics, in that employees must choose not to be enrolled or to opt out. Studies have found that if the employee must choose to opt in, only 70% will participate, but the percentage increases to closer to 90% if they must opt out. The employee contributions to the EMS are eligible to meet employee’s percent of salary required for the matching contribution. If a non-highly compensated employee becomes highly compensated, then they may no longer contribute but can maintain the Emergency Savings Account for future withdrawals. This is an optional provision, and the employer can choose to make it available in their plan document.
- Roth 401K accounts Required Minimum Distributions: The law until the end of 2023 had a Required Minimum Distribution for a Roth 401k, but that is repealed as of 1/1/2024. This was passed in order to make the 401k rule identical to the RMD rules for Roth Individual Retirement Accounts. This is a federal non-optional rule.
- Required Minimum Distributions from Inherited Retirement Accounts by non-spouse beneficiaries: This has been delayed for 3 years, but the IRS may implement this rule if the account is inherited from someone who was older than 73 at the time of their death. We shall see if they relent to pressure and merely require the account to emptied in 10 years. This does not apply to spouse beneficiaries and to eligible inherited IRA beneficiaries.
- Roth Matching Contributions by Employer: While this provision went into effect in 2023, it is unlikely to be adopted in 2023. That is, likely to change in 2024. Prior to 2023, a company matching contribution had to take effect pre-tax. With this change, you can opt to have the employer match take effect post-tax in your Roth account. The negative side of this decision is that the company match will be in after-tax dollars, and therefore it will show up as added income to your W-2 box 1, Federal Taxable Income, with no corresponding tax withholding.
- Qualified Longevity Annuities: The law now allows you to buy up to $200,000 of your pre-tax IRA account into a longevity annuity and not have required minimum distributions on that sum of money until age 85. If we can find investment vehicles that are cost-effective and economically viable, we will let you know.
- 529 Plan tax-free transfer to Roth Contributions: This is a new provision that allows you a solid option with excess 529 funds after your child graduates. If your 529 plan has been in existence for 15 years and the funds in the plan have been there for more than the last 5 years, you can make an annual Roth contribution ($7,000 or $8,000 if over 50 years of age) to the 529 beneficiary. This contribution is not subject to income limits, but it is limited to a maximum of $35,000 from each 529 account. If I had three accounts and three children, then I can contribute a maximum of $35,000 from each 529 account. This is a new rule that has tremendous latitude to work with.
It seems like every morning, I wake up and the laws get more and more complicated. Synthesizing these laws to maximize efficiency for your personal financial situation is what the Consulate team and I enjoy doing. Please let us know if anything above resonates for your 2024 planning so that we can more thoroughly analyze your situation.
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