Changes to retirement plans are included in the spending bill that President Biden is expected to sign in the next few days. It makes it easier for employers to help workers open emergency savings accounts, help employees repay student loan debt, and give more part-time workers access to retirement plans.
There are new twists to bothRoth individual retirement accounts andRoth 401(k)s, including an intriguing opportunity to move leftover money in a college savings account to a IRA.
A guide to the legislation was written by Tara Siegel Bernard. I gathered information from the bill, the Senate Finance Committee summary of retirement provisions, the College Savings Plans Network, and the Plan Sponsor Council of America.
There is a difference between a standard workplace 401(k) and a regular I.R.A.
If you have a non-Roth account, you can avoid paying income taxes. You pay income taxes according to your income tax brackets when you withdraw money.
You have to pay income taxes on the money you deposit in a rgs account. You don't have to pay taxes when you withdraw money. You have to follow certain rules to avoid taxes and penalties. There is more information in I.R.S. Publication 590- A.
There are a few different flavors of hirs. Individual investors can set up the I.R.A. through their own account.
Employers can make theRoth 401(k) available to their employees.
If you are new to retirement accounts, you can read my How to Win at Retirement Savings guide.
You don't have to start withdrawing money at 72, as you do with regular I.R.A.s. You can allow the entire balance to grow if you don't need the money in theRoth.
A regular 401(k) requires you to take money out on the same schedule as you would with a regular 401(k) The new bill would have the same rule as the old one.
Matching contributions can be offered to Roth 401(k)s the same way they are to regular 401(k)s. You have to put the match into a regular 401(k) before you pay taxes on it. Employers can allow employees to choose between a regular 401(k) or aRoth 401(k) plan. As soon as the bill is passed, it will take effect.
Why is this important? When your income tax rate is relatively low, you can deposit money in a rgs account. You can withdraw many years of earnings tax-free if your tax rate goes up.
Current retirement account rules allow people who are 50 or older at the end of a calendar year to put money away for retirement that exceeds normal annual contributions. People with money can catch up on savings if they don't have enough.
If you put the catch-up money away in a workplace retirement account, you won't have to pay taxes on it. Once the new bill is signed, those who earn more than $150,000 will have to put the catch-up money into aRoth 401(k) starting in 2024, which means they will have to pay income taxes on it.
For decades, some parents have avoided putting money into college savings accounts because of the risk of taxes and penalties if they no longer need the money for college expenses. If a child doesn't go to college the scenario could arise.
A rule that would allow parents to move leftover money into their own retirement accounts or a new account for a child has been advocated by the College Savings Plans Network. Adults who put a child's college savings ahead of their own could get a boost. Young adult children could start saving with the help of their parents.
The new bill solved some parental issues. Some families would be able to move their leftover savings to the I.R.A. There are a number of restrictions that aim to keep this from being too much of a wealth transfer for the wealthy.
Tara Siegel Bernard is a reporter.
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