The $1.7 trillion federal spending bill signed by President Biden in December includes several changes to retirement plans. Among them are changes to both Roth IRAs and Roth 401(k)s, including an opportunity to move leftover money in a 529 college savings account to a Roth IRA.
Roth IRA Accounts
A Roth account differ from a standard workplace 401(k) and IRA in the way Roth investors pay income tax. When you deposit money in a Roth, you pay income tax on it that same year. Then, when you withdraw money, usually you don’t have to pay taxes on your earnings in the account.
This allows you to deposit money when your income tax rate is relatively low, for example when you are younger and your income is lower. Then later in life when your income may be higher, you can withdraw your earnings tax-free.
Under the current rules for Roth IRA, you don’t have to start withdrawing money at age 72 as you do with regular IRAs. For the Roth 401(k), the same rules currently apply as for regular 401(k). However, under the new spending bill, this will change starting in 2024, when withdrawals are no longer required.
Catch-up Contributions
People age 50 or older can put more money away in traditional IRAs beyond the regular annual contribution limits, allowing them to catch up on retirement savings. Starting in 2024, people earning more than $145,000 will have to put that catch-up money into a Roth 401(k), meaning they must pay income tax on it before making the deposit.
Moving 529 Money into a Roth IRA
Parents who have a 529 college savings plan may find themselves with taxes and penalties if, for example, their child ends up not going to college. Under the new bill, families with leftover 529 savings will be able to move it to a Roth IRA starting in 2024. There are some restrictions, such as a $35,000 lifetime limit per account beneficiary.
UPDATE ON THIRD-PARTY PAYMENT REPORTING
In a recent blog (Year End Tax Planning, December 7, 2022) I reported that starting in tax year 2022, third-party payment settlement networks like PayPal or Venmo would report what you are paid over $600. Due to an overwhelmingly negative response from small business owners and lawmakers, the IRS is delaying this change for one year.
Previously, the networks only supplied an income report, called a 1099-K, if users received more than $20,000 or 200 transactions in a tax year. By lowering the income level to $600, many more small businesses and “gig workers” could be required to pay more taxes. Additional confusion could result since many network users also receive funds for personal transactions such as their share of a meal or ride-share.
As it stands, there is a year’s “reprieve” until the low $600 goes into effect for the 2023 tax season. However, with resistance mounting, it is too soon to tell what will happen. Keeping your own ongoing record of funds received will be helpful in anticipating your tax liability and making estimated tax payments.
If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
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