New IRA and 401(k) Rules in 2023: What You Need to Know About Changes to Retirement Accounts

President Joe Biden on Thursday signed the $1.7 trillion federal spending bill passed by Congress on December 23. The sweeping budget package includes aid to Ukraine and overhauls how Congress counts electoral votes. For those saving for retirement, the 2023 federal budget legislation includes major changes to retirement account rules. 401(k) plans, IRAs and Roth IRAs. These new changes to pension rules are being implemented under the SAFE Act of 2019 (short for “SAFE,” short for “Building Every Community to Grow Pensions”), and are collectively known as the SAFE 2.0 Act of 2022.

For most Americans with retirement accounts, the biggest changes are raising the age for required minimum distributions and raising “catch-up” limits for people over 60. But there are more than 90 different pension changes in total in the huge spending package.

With Biden’s signature, some retirement account changes will take effect immediately, while others will begin in 2024. Here’s what you need to know.

Required minimum distributions or RMDs in 2023

Currently, Americans must begin taking required minimum distributions from 401(k) and IRA accounts starting at age 72 (or 70½ if you turned that age by January 1, 2020). The Secure 2.0 Act of 2022 raises the RMD age to 73 beginning January 1, 2023, and then to 75 beginning January 1, 2033. (Roth IRAs are not subject to RMDs.)

The new rules also reduce the penalty for not taking RMDs. The previously steep 50% excise duty penalty will be reduced to 25% and further reduced to 10% if the error is rectified “in time”. The sentence reductions take effect immediately after Biden signs the bill into law.

New contribution limits for 401(k) plans and IRAs

While the standard limits for contributions to 401(k) plans and IRAs remain unchanged, the law would increase the “catch-up” limit for Americans over 50 and introduce additional potential “catch-up” contributions for those over 60.

IRS law currently allows people over age 50 to add an additional $1,000 to their retirement accounts each year beyond the standard limit. Starting in 2024, instead of $1,000, older Americans will be able to contribute an additional amount indexed to inflation.

Now, for people aged 60-63, they will soon be able to save more money. In 2025, those seniors will be allowed to contribute up to $10,000 a year or 50% more than the standard catch-up contribution for those age 50 and older, whichever is greater. Increasing contribution limits will also be indexed to inflation starting in 2025.

Changes to tax credits

The new law would repeal and replace the IRA tax credit known as the “Saver’s Credit.” Instead of a nonrefundable tax credit, those who qualify for the Saver’s Credit will receive a federal matching contribution to their retirement account. This change in tax legislation will start from the 2027 tax year.

Congress also amended IRS laws to change retirement accounts from 529 plans to tax-advantaged savings accounts for higher education. Currently, any money withdrawn from a 529 plan not used for education is subject to a 10% federal penalty.

Beneficiaries of 529 college savings accounts will be allowed to roll over up to $35,000 from the 529 plan to a Roth IRA over their lifetime. A Roth IRA will still be subject to annual contribution limits, and the 529 account must be open for at least 15 years.

New rules for early withdrawal

The Secure 2.0 Act of 2022 includes several rule changes that will benefit Americans who need to withdraw money from their retirement accounts early. Normally, withdrawals from retirement accounts before the account owner reaches age 59 and a half are subject to a 10% penalty tax.

First, Congress added a major emergency exception. Account holders younger than age 59 and a half can withdraw up to $1,000 a year for emergencies and have three years to claw back the distribution if they choose. If payment is not made, no emergency withdrawals can be made during that three-year period.

The new law also states that employees will be allowed to self-certify emergency situations, meaning no documentation other than a personal statement will be required. The law would also completely eliminate the penalty for the terminally ill.

Americans affected by natural disasters will also feel some relief from the changes. The new rules will allow for distributions of up to $22,000 from employer plans or IRAs in the event of a federally declared disaster. Withdrawals will not be penalized and will be treated as gross income for three years. The rule will apply to all Americans affected by natural disasters after January 26, 2021.

The new retirement rule changes will also allow account holders to take early withdrawals from 403(b) plans, similar to 401(k) plans. Currently, unlike 401(k)s, hardship withdrawals from 403(b) accounts only cover employee contributions, not earnings. Beginning in 2025, the hardship rules will be the same for 403(b) and 401(k) plans.

Student loan debt and saving for retirement

One of the more revolutionary changes included in the Secure 2.0 Act of 2022 is the option for employers to credit student loan payments against matching contributions to 401(k) plans, 403(b) plans or Simple IRAs. Government employers will also be able to contribute matching amounts to a 457(b) plan.

This means that people with significant student loan debt can still save for retirement just by making student loan payments without making any direct contributions to a retirement account.

The new regulation will enter into force in 2025.

Pension account changes for employers

The retirement account rule changes in the Secure 2.0 Act of 2022 will affect employers at least as much as employees. The biggest change for companies will be that starting in 2025, any new 401(k) or 403(b) plan must automatically enroll employees who don’t opt ​​out.

Auto-enrolled employee contributions will be a minimum of 3% and a maximum of 10%. After 2025, these amounts will increase by 1% each year until they reach the 10%-15% range. Pension plans created before 2025 will not be subject to the same requirements.

Changes to pension rules will also allow employers to offer workers “retirement-linked emergency savings accounts”, which will act as a hybrid between emergency and pension savings. Employers can automatically contribute up to $2,500 with up to 3% of their employees’ wages.

Contributions to these emergency accounts will be taxed and matched with the employer like Roth contributions. Employees can withdraw money from the account four times a year without penalty or additional taxes. If they leave the company, they can withdraw the emergency account as cash or roll it into a Roth account.

Other changes for employers will allow companies to automatically roll over a participant’s IRA into a retirement plan at a new employer unless the participant expressly opts out. The Secure 2.0 Act would also give pension plan administrators the option to decide not to refund overpayments accidentally made to retirees, and imposes protections and restrictions on retirees if companies decide to claw back the money.

More information for depositors

The Secure 2.0 Act of 2022 will introduce a number of sweeping changes to retirement in America as a whole. One of the biggest will be a mandate for the Labor Department to create a national, searchable database of pension plans to help people find lost or misplaced accounts. The agency will be required to operate the database within two years.

The Employee Retirement Income Security Act of 1974 will also receive an update. ERISA sets minimum standards for administrators of private retirement plans, including communications with participants.

The ERISA rule change will require private pension plans to provide participants with at least one paper statement per year, unless the participant opts out. The rule will not take effect until 2026 and will not affect the other three quarterly reports required by ERISA.

For more information about the scholarshipget answer all Your Social Security questionsincluding if you can get benefits while you are still working.

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