401(k) Retirement Savers Will See Big Changes

After a tough year for retirement savers, new legislation could make it a little easier to put money aside in 2023. The proposed changes would make it easier for people to save for retirement, and could help many people reach their financial goals.

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The changes to the tax code, which were part of an omnibus spending bill signed into law by President Joe Biden at the end of December, have been criticized for mainly benefiting high-income workers and for not going far enough to address America’s retirement crisis. Despite the challenges we face, including a large portion of the population with no retirement savings, this is a good start. According to Edward Renn, a partner on the private client and tax team of international law firm Withers, while some things may be made better through technology, it is at best a tune-up.

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According to Tim Steffen, director of tax planning at Baird Private Wealth Management, one of the more interesting changes is the ability to roll over money from a 529 college savings plan into a Roth IRA. Roths are funded with after-tax dollars, which then grow tax-free. Starting in 2024, beneficiaries with money left in 529s because they received more scholarships than expected will be able to roll some of the leftover funds into a Roth IRA without paying the usual 10% penalty for withdrawing money for non-education expenses.

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There is one catch though- the 529 account must be at least 15 years old. When transferring money into a Roth, no account growth from the past five years can be included. The annual maximum that can be put into a Roth IRA for 2023 is $6,500. The lifetime cap for 529 rollovers is $35,000. David Haas, founder of Cereus Financial Advisors, believes that the new 529 plan is beneficial for college savers who are afraid to invest in a 529 plan due to the possibility that their child may not attend college. Haas believes that the new 529 plan encourages college savings instead of retirement savings, and overall, he believes that this is a positive change.

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Starting in 2024, employers will be able to treat employee student loan payments as contributions to workplace retirement savings plans. This means employees will be able to qualify for matching contributions from their employers, giving younger people a head-start on saving for retirement.

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The Supreme Court is currently reviewing Biden's plan to write off up to $20,000 in student loan debt per borrower. In the meantime, student loan payments are on hold.
Employees who need to tap into their 401(k) before they turn 59 ½ can do so through a hardship withdrawal, but they will typically have to pay a 10% penalty, owe income tax, and won’t be able to repay the money into the account. Such withdrawals have been on the rise in recent years.

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In an effort to reduce the number of withdrawals from retirement accounts, employers will be allowed to offer emergency savings accounts alongside retirement plans beginning in 2024. This will give employees another option for saving money, which may help to keep more money in retirement accounts.

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Empower Retirement found that the number of 401(k) savers making emergency withdrawals increased by 24% in the 12 months leading up to September 30th. This jump indicates that more and more people are relying on their retirement savings to cover unexpected expenses. While this can be a helpful safety net in times of need, it's important to remember that these withdrawals will reduce your overall retirement savings. If possible, it's best to plan for unexpected expenses by setting aside money in a separate savings account.

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These accounts can hold up to $2,500, or an employer may set a lower limit. An employee can take one penalty-free distribution of up to $1,000 per year, and can repay it within three years. No more distributions can be taken over the three-year period unless the money is repaid.

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No. 1 on the list of things plan sponsors will be talking about is the optional student loan provision, according to Dave Stinnett, head of strategic retirement consulting at Vanguard. If unemployment starts to rise and financial conditions become more difficult, this is one of the easier changes to implement.
According to Shai Akabas, director of economic policy at the Bipartisan Policy Center, people in all income groups can struggle to pay for even small emergency expenses. This can be a major problem for people who don't have access to credit or other forms of financial assistance.

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"Even if you have a decent retirement account, you may not have enough money saved up for emergencies," he said. "People often raid their retirement accounts when they have unexpected expenses, which can start as a trickle and grow over time. Or they may take out payday loans, which can be difficult to repay. In some cases, people may not be able to pay their expenses at all."

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The bottom 90% of US households by wealth saw a record jump in consumer debt from June 2021 to June 2022 amid historic inflation. This increase in debt is likely due to rising costs of living and stagnant wages. This is a worrying trend that could lead to financial instability for many families.
The rules for catch-up contributions to retirement accounts have changed for savers aged 50 and over.

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Currently, older savers can put $7,500 into 401(k)s on top of the $22,500 annual contribution limit. In 2024, savers between age 60 and 63 in plans that allow catch-up contributions can save the greater of $10,000 or 50% more than the regular catch-up amount. (If the provision went into effect in 2023, that would be $11,250.
Currently, catch-up contributions can be split between regular 401(k) accounts and Roths. However, in 2024, employees making $145,000 or more must put catch-up contributions in a Roth, meaning they will not be able to reduce their taxable income.

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While some higher-income savers may be disappointed by the loss of the tax shelter, Stinnett from Vanguard advises against overreacting. She explains that diversification is not just about stocks, bonds, and cash, but also about tax diversification. Having a mix of tax-deferred and after-tax accounts gives savers more flexibility when withdrawing money in retirement.