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Changes Coming to a 401(k) Near You.

Hey folks!

We wanted you to be aware of a few changes coming down the pike based on legislation signed earlier this year. Some of these won’t take effect for a while, but some are already happening.

Here are a few updates coming to 401ks, IRAs and 529 plans:

2023 optional amendments (won’t go into effect unless your plan is amended to reflect these):

  • Employer match as…Roth?! Plans may now allow employees to direct employer match contributions to the Roth source. This holds huge potential advantages for the employee, but could cost the employer a bit. A couple of things to bear in mind: a) Roth contributions from employer would be added back to employee income at the end of the year, and b) contributions must be immediately vested.

  • Trust me, it’s a hardship: Plans can allow for participants to “self-certify” that their hardship withdrawal is a true hardship. This is in contrast to prior rules that required Trustees and HR departments to verify the hardship per IRS criteria.

  • Arriving at Terminal 7: Terminal illnesses may now be exempt from the 10% early distribution penalty assessed by the IRS, so long as a physician can verify that a participant has an illness that could reasonably result in death in the next seven years.

  • Must be present to win…an annual plan notice: Now, plans may be amended to only send an annual reminder of eligibility.

2023 changes that have already been instituted:

  • Required Minimum Distribution (RMD) starting age has been pushed back to age 73.

  • Penalty for missing RMD is reduced from 50% to 25% penalty tax.

    • The penalty is further reduced to 10% if corrected within two years of the RMD start date.

  • 529 education account provision: Account beneficiary will be allowed to transfer assets from a 529 to a Roth IRA. The 529 must be maintained for at least 15 years and there is a maximum lifetime transfer of $35,000 for a beneficiary. No transfers of contributions or the respective earnings within 5 years of the funding.

2024 for plans to consider:

  • Get outta here: Plans will be allowed to force out participant balances under $7,000 (current maximum threshold is $5,000)

  • 1,000 reasons not to stress: Withdrawals for certain personal and family emergency expenses can be exempt from the 10% early distribution penalty, as long as they are not greater than $1,000 per year, and as long as they are repaid within 3 years.

  • Lose the debt? Start investing? How about both? Student loan repayment may be treated as a retirement plan contribution and eligible for employer match if the participant cannot also make retirement plan contributions.

  • 401k as…Emergency Fund?! Allows for the creation of emergency savings accounts within the 401k for balances up to $2,500.

    • Non-HCE only

    • Employers may auto enroll participants at no greater than 3% of compensation on an after tax basis.

2024 changes that are coming:

  • Don’t blame me, I just (kind of) work here: Part-time employees must be eligible for elective deferrals after two years of service with at least 500 hours.

  • No more Roth RMD: Roth 401k balances are no longer counted for calculation of RMDs.

  • On to the next: Auto-portability allows for small balance, plan-to-plan portability between participating recordkeepers, allowing employees to more easily move plan balances to their new employer’s plan.

2025 changes that are coming:

  • Catch me if since you can: Catch up contributions increase to $10,000 or 150% of catch-up provision, but only for ages 60-63.

  • Volunt-told: Mandatory auto enrollment for plans started after 12/29/2022 are required to have implemented auto enrollment and auto escalate for all newly eligible employees.

    • Exclusions: companies with less than 10 employees, or having been in business for less than 3 years.

2026 changes that are coming:

  • Toll booth for Catch up: Catch up contributions for participants earning more than $145,000 in prior year will be treated as Roth contributions.

We hope these are helpful for you, whether you are a plan trustee or a participant looking to make the most of your plan and understand its benefits. As always, let us know if you have any questions or would like to see how this affects you personally. We’re here to help!

Any opinions are those of Tim Weddle, Financial Advisor, and not necessarily those of Raymond James. Any information is not a complete summary or statement of all available data necessary for making a decision and does not constitute a recommendation. Past performance may not be indicative of future results. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. The cost and availability of life insurance depend on factors such as age, health and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Guarantees are based on the claims paying ability of the insurance company. Prior to making an investment decision, please consult with your financial advisor about your individual situation.  


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