A variety of rule changes for retirement plans were enacted a year ago in the SECURE Act 2.0. Some of those changes had delayed effective dates. This article reviews changes affecting Roth retirement accounts that took effect on January 1 of this year.

Roth 401(k) accounts

A Roth 401(k) account is similar to a Roth IRA, in that there is no current income tax benefit, but all future distributions potentially are completely tax free. An important advantage of the Roth 401(k) account is that the contribution limit is much higher, so much more can be saved for retirement. A disadvantage has been that the Roth 401(k) account was subject to Required Minimum Distributions (RMDs), while the Roth IRA was not.

That changed on the first of the year, such RMDs are no longer required. However, they are still required for earlier tax years. If you’ve been taking RMDs already from a Roth 401(k), you should have taken one for the 2023 tax year, for example. But you won’t need to take one for this year.

Note that the age at which the RMD rule begins is now 73. Those who were born in 1954 or later can wait until next year to begin their required distributions.

529 plan conversions

What happens if the amount of money saved in a 529 college savings plan turns out to be more than is needed for college? At today’s tuition rates, that may seem an unlikely result, but it can happen. Another family member may be named as the account beneficiary, or the money can be withdrawn, but then is subject to taxes and penalties.

Beginning this year, there is another option. The excess funds may be rolled over into a Roth IRA for the student beneficiary. Although this sounds like an excellent alternative, as the new graduate gets an early start on his or her retirement nest egg, there are important limits.

• The rollover will be considered an IRA contribution, subject to the IRA contribution limits. For 2024, that limit is $7,000 or 100% of earned income, whichever is lower. Therefore, the new graduate must have earned income at least equal to the rollover amount.
• If the full $7,000 is rolled over in 2024, the new graduate is not allowed any additional IRA contributions. However, this does not affect eligibility to contribute to an employer’s retirement plan, such as a 401(k) or Roth 401(k).
• A lifetime limit of $35,000 applies to these rollovers, so it will take about five years or so to reach the cap.
• The account must have been open for more than 15 years.
• Contributions and earnings on those contributions from the preceding five years may not be rolled over.

The primary tax benefit of the 529 savings plan remains the avoidance of all taxes on withdrawals used to pay qualified education expenses, while the new possibility of rollover of unused funds to a Roth IRA makes the strategy still more attractive.

Do you have a question concerning wealth management or trusts? Call us at 920-563-6616 ext. 3070, or email wealth@bankwithpremier.com.