Saving for Retirement Just Got Easier

It seems so rare these days that we can celebrate any news coming out of Washington. But two recent actions by the government should be celebrated, because they are helping Americans’ ability to save for retirement. Let’s breakdown two of the big changes:

1. You can now save more in tax-advantaged retirement funds (401k, IRA, Roth)

For employer-sponsored plans, such as 401k and 403b accounts, the annual contribution limit was increased from 20,500 to 22,500. This is a response by the government to high inflation, which clocked in at over 7% in November. While $2,000/year doesn’t seem like a big deal, it is, especially for early and mid-career professionals with many years until retirement. Over a long period of time (say 25 years), a $2,000 extra annual contribution could mean an additional $100k-$150k in retirement!

What about for savers closer to retirement? The IRS has something for you, too, with an improvement to the catch-up contribution amount. The catch-up contribution is an extra amount you can contribute to your retirement accounts if you’re over the age of 50. For 2023, the catch-up contribution limit was increased to $7,500 from $6,500 for 401k and 403b plans. So, if you’re over 50, the maximum amount you can contribute is $30,000, up from $27,000.

For people who have an IRA or Roth IRA, annual contribution limits have increased for both by $500 to $6,500 for eligible individuals. The IRS did not raise the catch-up contribution amount for traditional or Roth IRAs. Roth IRAs are available to certain income brackets only. In 2023, the amount you can contribute to an Roth is phased out once your income reaches $138,000 for single filers ($218,000 for Married Filing Jointly). Once income reached $153,000 for single filers ($228,000 for Married Filing Jointly), savers are not eligible for Roth IRA contributions at all.

2. SECURE 2.0 Act allows 529-to-Roth rollovers

Prior to the law’s passage, funds distributed out of a 529 college savings plan used for anything other than education expenses would incur penalties and taxes. This led savers to worry that if they overfunded their kids’ college education, or the kids end up not needing it, funds would be stuck in the 529 or subject to penalties.

The new provision gives parents a lot more flexibility with these education savings. Beginning in 2024, beneficiaries can roll up to $35,000 in total to a Roth IRA, subject to annual contribution limits. This means you can reallocate tax-advantaged funds set aside for education expenses towards your or your children’s retirement.  This is also an interesting way to “back-door” Roth contributions, because 529-to-Roth rollovers are not subject to the income limits discussed above. However, the 529 account does need to be open for at least 15 years prior to a Roth rollover.

The SECURE 2.0 Act has many other impacts on retirement savings, no matter your career stage. If you’d like to review your retirement plan, please schedule a call with one of our advisors for a no-obligation, no-pressure consultation.