It’s hard enough to learn all the retirement account laws and rules. Keeping up with retirement account changes from year to year is a tall order for the best of us.
Congress passed a slew of new retirement account changes recently. And three of them are worth singling out for how they may be able to help your wallet.
Money expert Clark Howard pointed out the three new benefits on the June 14 podcast episode.
“Congress made a bunch of changes in tax law. And several of these add additional complexity to saving for retirement,” Clark says. “But [they offer] potential wonderful benefits depending on your situation.”
You can now elect to take your company 401(k) match via Roth. If you’re a small business owner or you’re self-employed, and you are using a SEP or SIMPLE IRA, you now have a Roth option. And starting next year, if your child doesn’t attend college, you can convert his or her 529 plan funds into a Roth IRA.
I’ll explain each of those changes in more detail in this article.
Table of Contents
- Roth 401(k) Company Match Now Available
- SEP, SIMPLE IRAs Now Offer Roth Option
- 529 Plans Can Convert To Roth IRAs Starting in 2024
Roth 401(k) Company Match Now Available
A 401(k) plan is one of the most common and understood retirement accounts.
If you are a full-time employee, chances are you have access to one.
Of course, the best part of a 401(k) plan is the company match. Many employers will “match” a certain percentage of the amount you put into your 401(k).
The most common match is 50% of your 401(k) contributions up to 6% of your salary, but the details will vary by company.
Contributing enough to your workplace 401(k) account to get the full match is a tremendous idea. It’s the equivalent of giving yourself a raise.
Plus, since the dollars your company is giving you are going straight into a retirement account for you to invest, by the time you are ready to use that money, it could be worth a lot more.
As you may know, Clark is a huge fan of the Roth option for many people. It allows you to pay taxes on the dollars up front — and then withdraw and spend them tax-free in retirement.
Historically, however, even if you chose a Roth 401(k) for your contributions, the company match funds always went into a traditional 401(k).
“If you’re fortunate enough to work for an employer that has an employer match, the match automatically goes traditional. Meaning that you’ve not paid tax on it. And whatever’s in that, and the growth it would have over the decades, everything in that is taxable,” Clark says.
“Which is not the end of the world. Because remember, it’s free money the employer gave it to you.
“But now you have an option under the law that basically nobody knows about. I saw it in Barron’s. And nobody but pointy-headed people like me read Barron’s. You can put money in your 401(k) in the Roth. The employer match that normally would automatically go traditional, you have the option to elect that that be additional Roth money and pay the tax on the free money the employer gave you upfront.”
Some Companies, 401(k) Administrators Do Not Offer This Option Yet
After Clark mentioned the retirement account change on his podcast, Team Clark received feedback from several listeners. Those listeners went to check whether they can start receiving their company match via Roth 401(k) instead of traditional — only to learn that their employer or their 401(k) administrator still doesn’t offer that option.
“It’s up to an employer when they implement certain changes. And this is one of those,” Clark says. “This is a new thing. It’s got a shakeout period. And just because the law gives a green light for it doesn’t mean it’s available to you yet.
“So the frustration you had is my fault because I didn’t say it’s going to be something that the administrator of the plan and your employer are going to have to say yeah, we’re going to permit people to do that.”
SEP, SIMPLE IRAs Now Offer Roth Option
If you’re self-employed, you’re allowed to use a solo 401(k). However, if you have any employees, you’re no longer allowed to participate in a solo 401(k).
The other downside is that solo 401(k) plans require a lot of administrative work.
Up until now, those retirement accounts only allowed traditional options. So any contributions are pre-tax — they reduce your taxable income for the year — but you’ll owe taxes on the money when you withdraw in retirement.
“Those were always traditional only. Meaning you got an up-front tax benefit. But everything in the account was taxed later in your life,” Clark says.
“Now you have the same Roth option available for you as an employer if you want to offer a SEP or a SIMPLE. If you want to have Roth money instead of all money that will be taxable later in life, you now have that option.”
529 Plans Can Convert To Roth IRAs Starting in 2024
The third retirement account change that Clark highlighted is something that your children should celebrate.
A 529 plan allows you to save and invest money tax-free for your child’s college education. It’s a tremendous way to pay for college, which gets more expensive every year.
But there’s an inherent risk to 529 plans. If your child doesn’t attend college, your choices were lousy. You could gift the money to another relative for their college education. Or you could take the money out of the 529 plan. But you’d owe federal income taxes, plus a 10% IRS penalty.
Starting next year, though, you have a new, better option that excites Clark.
“Now if your kid is one of the one in three who doesn’t go to college, you’re able to convert [the 529 plan] year into a Roth IRA for them. So it is never taxed,” Clark says.
“[Before], you can’t do a Roth for a kid until they’re working. Well, now it means you can basically do a Roth in a back-door way starting at the time of a kid’s birth.
“Can you imagine how much the money would be worth down the road? It’s capped at $35,000. You can do this under the law starting next year. But what an incredible deal to be able to put that money in, have it be used for education or have it be used for a retirement account. Both strategies end up working in that one 529 account.”
Congress made some helpful retirement account changes that can help you pay less in taxes and save more for retirement.
If a Roth 401(k) or IRA is a better choice for you, you have more options than ever. And if you’re wanting to save for your child’s college education, but you’re not sure whether he or she will go to college, you’re going to have more financial flexibility starting in 2024.