This month, I'm happy to provide you with some interesting information related to 401(k) savings and 529 plans. In the next newsletter, scheduled for early November, we'll delve into an economic and market summary, offering valuable insights tailored to Q4.
If you have questions or if this prompts a desire to discuss your specific financial strategy and goals, please know that I'm just a phone call or email away. Your financial well-being is our top priority, and we're here to offer guidance whenever you need it.
Good news for older, higher-paid 401(k) participants and their employers: the IRS has announced a welcome transition period. Originally scheduled for 2024, the SECURE 2.0 Act introduced a rule requiring these individuals to make catch-up contributions to after-tax Roth accounts instead of pre-tax traditional accounts. Responding to employer concerns, the IRS has now postponed this change until 2026.
Additionally, we anticipate annual 401(k) contribution limits increasing again in 2024. The IRS has not yet published what these changes will be, so keep on the lookout as the changes are usually announced around this time of year. People over the age of 50 can contribute more through the catch-up provision. We anticipate that the contribution limit increase will apply to the base amount, referred to as the employee deferral amount (currently $22,500), and/or the catch-up contribution (currently $7,500).
The SECURE 2.0 Act also proposes various other retirement-related changes, such as adjustments to Roth account matching, changes regarding required minimum distributions, and the implementation of automatic enrollment for eligible employees into 401(k)s (starting in 2025, in most cases, eligible employees must be auto-enrolled for plans established on or after 12/29/2022). It may also make retirement planning more accessible by allowing employers to match contributions based on student loan payments. The IRS will issue further guidance in order to give taxpayers, tax planners, and plan administrators ample time to adapt to these significant changes.
Starting in 2024, 529 Plans Can be Rolled Into Roth IRAs
In the face of continually rising college tuition costs, parents and students are constantly seeking more cost-effective ways to save for higher education. A recent legal amendment may provide a solution. The SECURE Act 2.0 targets 529 plans—tax-advantaged accounts designed for education savings. Traditionally, these accounts come with restrictions and penalties for non-educational withdrawals. However, beginning in 2024, unused 529 funds (up to a $35,000 lifetime cap, $6,500 annual based upon current limits) can be rolled into a Roth IRA without incurring penalties.
This change presents an opportunity for families to repurpose college savings should circumstances shift, and their children opt not to use 100% of the funds for educational purposes. Although this change officially takes effect in 2024, it introduces a practical strategy for families strategically planning for their children's future education expenses.
Items to note:
Certain rules and limitations apply, including the necessity to establish the Roth IRA for the student beneficiary and adhering to the $35,000 lifetime cap for the rollover.
A restriction requires that a 529 plan must be established for 15 years prior to a Roth IRA rollover. Contributions made in the most recent five years are also not eligible for that rollover.
The IRS is anticipated to clarify additional details, such as the implications of changing the beneficiary and if the $35,000 lifetime cap will increase over time.
When making contributions to a 529, consider the potential tax deductibility against your state income tax.
Did you know that connecting us with your tax advisor can make a significant impact on achieving your financial goals? By working closely with your CPA or tax expert, we can explore opportunities to strategically improve your retirement savings, minimize tax obligations, manage taxable income, and strengthen your estate plan.
Financial Advice is offered through Certus Wealth Management LLC, a Registered Investment Adviser.
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This material prepared by Certus Wealth Management, LLC (“Certus Wealth”) is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Opinions expressed by Certus Wealth are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Facts presented have been obtained from sources believed to be reliable. Certus Wealth, however, cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Certus Wealth does not provide tax or legal advice, and nothing contained in these materials should be taken as tax or legal advice.
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