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The retirement savings crisis has garnered a lot of attention in recent months. The uncomfortable reality that many Americans may not have enough money saved to enjoy traditional retirement has been the catalyst for change. This has led to the introduction of state-managed private saving plans for private-sector employees that do not have access to an employer-sponsored option. California and Illinois have implemented programs known as CalSavers and the Illinois Secure Choice program. Concurrently, Congress recently passed the SECURE Act 2.0, which makes several significant changes to retirement savings and administration regulations. All are designed to make access, participation, and retirement savings easier for workers with limited options.
Earlier this month, the Biden Administration released the proposed Budget of the U.S. Government – Fiscal Year 2024. It is an enormous document that features hundreds of pages of information detailing information on budgetary goals, tax changes, and new initiatives for a variety of communities. However, it also includes an outline of changes impacting benefit plans and, ultimately, retirement savings. While the budget is currently in the proposal phase, it does provide important insights into changes that may be forthcoming. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.
Proposed Retirement Plan Changes
- Special Distribution Rules – The proposal would require high-income taxpayers with vested account balances that exceed $50M on the last day of the preceding calendar year to take a minimum distribution of 50% of the excess. Impacted plan types include defined contribution plans (including 401a and 403b plans), eligible 457(b) plans, and Individual Retirement Accounts (IRAs). If the account balance exceeds $20M, the distribution is subject to a floor. This amount is considered the lesser of the excess amount or the portion of the taxpayer’s balance held in a Roth IRA or other Roth account. High income is defined as a taxpayer with an income over $450,000 (married filing jointly), $425,000 (head of household), and $400,000 in all other cases. If approved, the change would become effective for tax years after December 31, 2023.
- Limit Roth IRA Rollovers & Conversions – The proposal would create a new rule that prohibits the rollover to a Roth IRA amount distributed from an employer-sponsored retirement plan that is not Roth-eligible for high-income taxpayers. It would also prohibit the rollover of a distribution from a tax-favored retirement plan into a Roth IRA unless it was from a designated Roth account included as part of the plan. In addition, it would also prohibit the rollover of a distribution from a tax-favored account into a Roth account. If approved, the change would apply to distributions made after December 31, 2023.
- Prohibit IRA Ownership of DICS/FSAs – There would also be a restriction preventing an IRA from holding an ownership interest in a DISC or FSA that receives payments from an entity owned by the account holder. The penalty for non-compliance includes having all IRA assets distributed on the first day of the taxable year. If approved, it would impact transactions initiated after December 31, 2023.
- Statute to Limitations – There would be an extension of the statute of limitations in cases involving a substantial error in the valuation of IRA assets from three to six years. It would also extend the same for excise taxes on prohibited transactions from three to six years. If approved, the change will be effective taxes, for which the three-year window would end after December 31, 2023.
We’re here to help
The changes called for in the 2024 Budget will significantly impact the retirement planning and savings strategy for many individuals and families. At present, these are simply proposals and still must undergo Congressional review before becoming final. Despite this, it does provide important insights into future changes. If you have questions about the information outlined above or need assistance with a retirement plan audit, JLK Rosenberger can help. For additional information, call 818-334-8646 or click here to contact us. We look forward to speaking with you soon.