If you want to cut your taxes and save more for a secure future, stay with me to learn more about Roth-related retirement updates.
Laura answers a listener’s question about IRA contributions and covers five changes to Roth accounts starting in 2023 that everyone should know.
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Hi, everyone, and welcome back to Money Girl! Since 2008, I've been bringing you personal finance and small business tips every week to build your financial wisdom and wellness. My mission is to help you make better money decisions and reach your dreams.
I'd love you to subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen so you never miss a weekly episode. You can also participate by sending your money questions or comments using our voicemail line at 302-364-0308.
Today's show was inspired by a question from Sabbi, who says, "I've been listening to your podcast for a year now and love the show! I wonder what happens if I max out a Roth IRA by contributing $6,500 this year and receive dividends, such as a quarterly payout of $20. Would my total contribution increase to $6,520, causing me to exceed the allowable limit?"
Thanks for your great question Sabbi! Retirement account rules can be confusing, especially for Roths. Plus, the rules typically change a little from year to year, so it’s critical to stay on top of them.
This show will answer your question and cover five changes to Roth accounts starting in 2023 that everyone should know. So, if you want to cut your taxes and save more for a secure future, stay with me to learn more about Roth-related retirement updates.
At the end of 2022, the SECURE Act 2.0–which stands for Setting Every Community Up for Retirement Enhancement–became law. It expands earlier legislation and includes many changes that strengthen Americans' retirement options.
First, I'll highlight five Roth-related changes you should know and then answer Sabbi's question about allowable contributions.
1. Workplace Roths have no required minimum distributions (RMDs).
Before the SECURE Act 2.0, the only retirement account that allowed you to skip required minimum distributions was a Roth IRA. Even workers with a Roth 401(k) or 403(b) had to start RMDs at age 72–unless they rolled over funds to a Roth IRA.
But starting in 2024, if you have money in a workplace Roth, you won't be subject to mandatory distributions. While many people choose to consolidate old retirement plans into an IRA, there are benefits to leaving funds in an employer plan.
For instance, an employer plan may offer lower fees and more investment options. Plus, they're covered by the federal ERISA (Employee Retirement Income Security Act), giving you more protection than IRAs, which get regulated at the state level.
And by the way, starting in 2023, the new legislation increased the age for traditional retirement account RMDs from 72 to 73. And in 2033, the RMD age will jump to 75.
2. Roth IRAs can receive penalty-free rollovers from 529s.
Another big change related to Roths affects anyone with a 529 college savings plan. These tax-advantaged investment accounts are designed to help families save for future education expenses.
With a 529, you contribute and invest funds using a menu of choices, such as mutual funds, that grow tax-deferred. Then you can pay qualified expenses, such as tuition, supplies, and room and board at eligible colleges and universities, tax-free. Plus, you can use $10,000 per year per child for education at private primary and secondary schools without paying taxes or penalties.
One problem with 529s is not knowing exactly how much you might need to save for future education expenses. If you save too much and take non-qualified withdrawals, they're subject to a steep 20% penalty.
To reduce 529 penalties, the SECURE Act creates an entirely new rule. Starting in 2024, you can roll over up to $35,000 to a beneficiary's (the student's) Roth IRA over their lifetime with no taxes or penalties.
Note that you still must adhere to the annual IRA contribution limit, which is up to the beneficiary's earned income for the year up to $6,500 for 2023. And you can only do a Roth IRA rollover from a 529 if the plan was open for at least 15 years. Also, contributions and earnings made within the previous five years are not eligible for a rollover.
If you’re ready to open a 529 or have questions about the options, Backer is an excellent place to start.
3. Employer contributions can go to a Roth account.
Before the SECURE Act, employer matching and non-elective contributions, such as profit sharing, had to be contributed to a pre-tax, traditional retirement account. Effective immediately, employers may, but aren't required to, offer employees the option to treat some or all their employer-paid funds as Roth contributions–if they come with immediate vesting.
Remember that because you must pay tax on Roth funds, they get included in your annual gross income. So, if you receive significant employer matching or profit-sharing contributions to your Roth, you could receive a surprise tax bill. Therefore, consider adjusting your withholding to pay more income tax throughout the year if you opt to receive Roth funds from your employer.
ALSO SEE: 7 Pros and Cons of Investing in a 401(k) Retirement Plan at Work
4. Catch-up contributions must go to a Roth account when you’re highly paid.
The SECURE Act also makes a big change to catch-up contributions for retirement plan participants over 50. For 2023, they can make additional catch-up contributions of up to $7,500 to most traditional or Roth workplace accounts.
But starting in 2024, certain highly paid workers can only put their catch-up contributions in a Roth (with some exceptions). The rule considers an employee who earned more than $145,000 in the prior year as "highly paid" and subject to this rule. So, if you earn $145,000 or less, you're exempt from the requirement and can put your catch-up contributions in a traditional account.
Since Roth contributions get made on an after-tax basis, highly paid plan participants no longer have the option to make and deduct pre-tax catch-up contributions. While that increases your annual taxable income, getting tax-free Roth withdrawals in retirement is an upside.
Another change that starts in 2025 is an increase in the catch-up contribution limits for employees aged 60 to 63 to $10,000. Again, no matter your age, being highly-paid means that you must put catch-up contributions in a Roth on an after-tax basis.
5. A Roth account can be for emergency savings.
Starting in 2024, workplace retirement plans can offer a linked "emergency savings account" for non-highly paid employees to make Roth contributions. You can save up to $2,500 (or a smaller amount established by an employer) and make a certain number of penalty-free distributions per year.
Depending on the plan rules, emergency savings contributions may be eligible for an employer match. And if you leave your employer, emergency savings can be transferred to your Roth retirement account in the plan or distributed as cash.
Another benefit starting in 2024 is that employers can match employee student loan payments by contributing to their retirement accounts. The loan payments get treated as retirement contributions for matching qualifications.
These changes were designed to incentivize workers to save for emergencies and pay off their student loans. Employers must rely on employees to certify the amount of qualifying student loan payments they make each year.
RELATED: Roth IRA vs Roth 401(k)--10 Differences Investors Should Know
Now, let’s get back to Sabbi’s question about what happens when the total of your IRA contributions and account earnings exceed the annual allowable limit of $6,500 or $7,500 if you’re over 50.
Sabbi, the good news is that there’s no limit on your annual retirement account earnings, and the more, the better! The only limit is how much you contribute to the account annually.
In addition, Roth IRAs have an annual income limit making high earners ineligible to contribute. For 2023, single taxpayers making $153,000 or above and married couples filing joint taxes making $228,000 or above are ineligible to put funds in a Roth IRA.
Sabbi, thanks again! I hope this Q&A and the five Roth-related retirement changes I covered help you save and invest more for your future. Contributing to any Roth account is an excellent way to cut taxes, grow your money, and achieve your retirement deams.
That's all for now. I'll talk to you next week. Until then, here’s to living a richer life.