On December 29, 2022, the Enhancing American Retirement Now (EARN) Act was signed into law. The EARN Act includes several key provisions that may impact how you plan for retirement, including, as detailed below, changes to required minimum distribution (RMD) rules; adding a provision to allow savers to rollover a Section 529 Plan to a Roth IRA; and providing employers the opportunity to treat student loan payments as retirement contributions for purposes of an employer match.
Beginning Date for Required Minimum Distributions.
Previously, individuals with retirement plans were required to begin taking RMDs from their account at 72 years of age (this was 70.5 years of age prior to January 1, 2020). The EARN Act has increased the age of the required beginning date to age 73 starting in 2023. In the years 2023 through 2032 the required beginning date to begin taking RMDs is 73 years of age. Starting in 2033, the required beginning date increases to 75 years of age. The change could be a big benefit for retirees as it will allow them to defer taxes on retirement accounts for an additional 3 years starting in 2033.
In addition, this may make Roth plans slightly less desirable. One benefit of Roth IRA plans is that the owner of a Roth IRA does not need to take required minimum distributions (unless inherited from a non-spouse). Pushing out the required beginning date for RMDs from traditional IRAs effectively means that an owner of a Roth IRA would lose three years of the "no required minimum distribution" advantage as compared to a pre-tax retirement account (traditional IRA).
No RMDs for Roth 401(k), 403(b), and 457 Accounts.
Prior to the EARN Act, Roth 401(k), 403(b), and 457s (employer sponsored plans) were treated differently than Roth IRAs. Specifically, owners of Roth IRAs did not have to take RMDs, but owners of Roth 401(k), 403(b), and 457 accounts would (unless the owner rolled over the Roth 401(k), 403(b), or 457 account into a Roth IRA). The EARN Act, however, now treats these types of accounts the same. Accordingly, there will be no required minimum distribution for owners of any of these types of account. This change becomes effective starting in 2024.
Student Loan Payments Will Count as Retirement Contributions for Purposes of an Employer Match.
Young professionals and college graduates know the burdens of student loan payments all too well. For some, student loan debt prevents them from saving for their retirement. The EARN Act attempts to remedy that by allowing companies to treat student loan payments as retirement contributions for purposes of an employer match. This does not mean that employers are required to treat student loan payments as retirement contributions for purposes of matching, but merely allows employers to offer this as part of their benefits package. This provision will become effective starting in 2024.
Changes to Penalties for Failing to take RMD.
If you are required to take a RMD from a retirement account (or an inherited retirement account) and fail to do so, the government can impose draconian penalties. Currently, there is a 50% excise tax on the failure to take RMDs. The EARN Act reduces the excise tax to 25% and, additionally, reduces the excise tax to 10% where the individual makes a timely correction to such failure. This provision is effective starting in 2023.
Section 529 Plan Roll-Over to Roth IRA.
Prior to EARN, individuals were unable to roll-over unused portions of a Section 529 Plan into a retirement account. EARN, however, now allows for Section 529 Plan account holders to roll-over these funds into Roth IRAs under certain circumstances. In order to qualify, the Section 529 Plan must be in effect for at least 15 years prior to the rollover, the amount transferred to the Roth IRA cannot exceed the total aggregate contributions made over the five years prior to the rollover, and the annual transfer amount is limited to the Roth IRA contribution limits. The EARN Act also imposes a $35,000 lifetime limit on the amount that the individual can transfer from the Section 529 Plan to the Roth IRA.
Additional Questions.
These are summaries of some of the major provisions of the EARN Act. There are additional provisions that may be of interests to clients. If clients have questions or would like to discuss any of the provisions of the EARN Act, we urge them to contact us for more details.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.