Here are new laws taking effect in 2024 that will impact how Californians save for retirement

Changes are coming that will impact some people’s 401(k) plans and IRA savings

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More changes are coming to retirement savings next year when key provisions of the federal Secure 2.0 Act take effect.

They will affect families saving for college in a 529 plan, employees with so much student debt they can’t save for retirement, workers leaving a company with a smallish 401(k) balance, older people with money in a Roth 401(k) account or Individual Retirement Account and people who might need to tap retirement savings for emergencies.

More changes are coming to retirement savings next year when key provisions of the federal Secure 2.0 Act take effect.

They will affect families saving for college in a 529 plan, employees with so much student debt they can’t save for retirement, workers leaving a company with a smallish 401(k) balance, older people with money in a Roth 401(k) account or Individual Retirement Account and people who might need to tap retirement savings for emergencies.

California has not yet conformed to this law. When the limit goes up, say to $1,100, Californians could still contribute that amount and deduct $1,100 on their federal return. But the extra $100 would not be deductible on their state-tax return. 

When the money comes out, it will all be taxable on the federal return but the taxpayer would then reduce the taxable amount by $100 on the state-tax return. “If we don’t conform for years, those non-deductible amounts can add up,” said Renee Rodda, a senior vice president with Spidell, a tax-information firm.

Rollovers from 529s to Roth IRAs

Many parents and grandparents set up a 529 college-savings account for a child or grandchild (called the beneficiary). There is no federal tax deduction for money that goes into the account; however, some states — though not California — have state-tax incentives for contributions.

The lure is that money in a 529 account grows tax free and remains tax free when it comes out if it’s used for qualified higher-education expenses.

If it’s used for other purposes, the portion that represents account earnings is subject to federal and California income tax and possible penalties (10% federal, 2.5% California). That discourages some families from saving too much, in case the beneficiary doesn’t attend or drops out of college or goes to a less expensive school.

Starting next year, any unused 529 funds can be rolled into a Roth IRA named for the same beneficiary — and thus escape federal tax and possible penalties — subject to these conditions:

  • The 529 account must have been open for at least 15 years.
  • Any contributions (and earnings on those contributions) made to the 529 account within the last five years can’t be moved to the Roth IRA.
  • Annual rollovers, including any other money the beneficiary put into the Roth IRA, can’t exceed the annual Roth IRA annual contribution limits ($7,000 in 2024 or $8,000 if the Roth account owner is older than 50). However, the income limits that apply to Roth IRA contributions don’t apply to the 529-to-Roth rollover.
  • The aggregate rollover can’t exceed $35,000 over the beneficiary’s lifetime.
  • The beneficiary must have income from a job or self-employment at least equal to the amount of the rollover.

This change “may help some individuals that came from well-off families that can now get a Roth IRA started for those who didn’t use it up,” said Craig Copeland, director of wealth benefits research with the Employee Benefit Research Institute.

However, to meet the 15-year holding requirement, the 529 plan must have been opened when the child was around 7 to make a rollover at age 22. “Near term, I don’t think it’s going to have much impact,” Copeland said. However, it could over time if Congress loosens the rules.

California has not conformed to this new provision. As a result, any earnings on 529 funds rolled into a Roth IRA would be subject to California income tax and a possible 2.5% penalty, according to Spidell. These 529 penalties are not age-related, Rodda said.

Forced distributions

When an employee leaves a company with a small balance in the 401(k) plan — currently, less than $5,000 — the employer can automatically distribute the money to the departed employee and close the account. If the balance is at least $1,000, the plan must roll the 401(k) money into an IRA unless the former employee says not to.

Next year, this threshold for “forced distributions” goes to $7,000, which should prevent more money from leaking out of the retirement system. 

Matching student-loan payments

Some employees have so much student debt they can’t save in their 401(k) plans and are missing out on matching contributions from their employer. To help them out, starting next year, employers may make contributions to the employee’s 401(k) plan that match their qualified student loan payments. The employer must match contributions for student loan payments at the same rate as they do for employee 401(k) contributions. 

The employer will have to verify that employees are making student loan payments. That could be a hassle for employers, but there are companies already doing this for other programs that match employee student-loan payments outside of 401(k) plans, Copeland said. 

Whether employers offer this benefit could depend on their workforce. “If they have a lot of young, educated workers who are not contributing to the 401(k), they might. If they have a lot of workers who are already contributing, they might not,” Copeland said.

No more RMDs from Roth employer plans

If you have money in an employer-sponsored Roth 401(k) or 403(b) plan, you must begin taking required minimum distributions, known as RMDs, at a certain age (currently 73 for those born in 1951 or later), even though the withdrawals are not taxable. 

Roth IRAs, on the other hand, don’t require RMDs until the owner has died.

Starting in 2024, Roth 401(k) and 403(b) accounts won’t be subject to RMDs during the owner’s life, to match the Roth IRA rules. 

RMDs will still be required from traditional pre-tax, non-Roth 401(k) accounts.

Emergency withdrawals

Some people are afraid of locking up too much money in pre-tax (non-Roth) retirement accounts in case they need it for emergencies. If they are younger than 59½ (or 55 and withdrawing from a former employer’s plan) they may be subject to a 10% federal- and 2.5% state-tax penalty. There are already some complicated exceptions to these penalties for early withdrawals for certain needs and hardships.

Secure 2.0 creates two more exceptions. Starting in 2024, people can withdraw up to $1,000 a year from their 401(k) plans or IRAs for emergency expenses without incurring the 10% early distribution penalty. Emergencies are defined as unforeseeable or immediate financial needs relating to personal or family emergency expenses.   

“Only one distribution of up to $1,000 per year is allowed, and the funds must be repaid within three years. If the funds haven’t been repaid within the three-year period, no additional hardship withdrawals can be made,” Mark Friedlich, vice president, with Wolters Kluwer, Tax and Accounting, said via email.

“Income tax is payable in the year of withdrawal. A refund of the tax is obtainable if the repayment is made after the year of withdrawal by filing an amended tax return for the year in which the withdrawal was made,” he added.

Employers would have to add this option to their 401(k)-type plans.

The Act also gives employers the option of offering “emergency savings accounts” linked to their 401(k) plans. Employees could make Roth (after-tax) contributions to the account until it reaches $2,500, although employers could set a lower limit. Highly compensated employees (making more than $155,000 in 2024) could not participate.

Employers could automatically opt employees into these accounts at a rate of up to 3% of eligible wages, unless the employees opt out. Employees would not have to give a reason for the withdrawal and could replenish the account when it dropped below the maximum.

Keep in mind that with Roth IRAs, “the after-tax contribution funds can be withdrawn for any reason without incurring additional tax or penalties. However, the ‘earnings’ in the Roth IRA are subject to a penalty and income tax except if it’s done for a first home purchase or birth of a child,” said Friedlich.

Asked if employers are likely to offer one or both emergency options, Copeland said they are most likely to add the $1,000 component first because “it’s more straightforward.”

Click here to read the full article in the SF Chronicle

Comments

  1. First SECURE really hurt families by getting rid of unlimited stretchout that could have made kids wealthy.

    Too many rule changes, don’t trust these plans.

  2. ANTHONY LOVE says

    Ho Biden is an Beta Male that needs to let an alpha make Trump take over the country! Biden has no balls unless it has to do with under aged girls, then he acts like a alpha make! This boy is not a leader, he is the wuss wuess with no back bone. Fire his ass gone!

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