Retirement Plan Update: ERISA and Contribution Changes
At the end of October, US Department of Labor (DOL) announced a rule expanding what’s considered “fiduciary investment advice” under the Employee Retirement Income Security ACT, better known as ERISA. This will include guidance from those involved in employer-sponsored retirement plans.
The most notable difference will be a change to the five-part test, which will now state that investment advice will be considered fiduciary if the person providing it “does so on a regular basis as part of their business.”
The advice must also be “provided under circumstances indicating that the recommendation is based on the particular needs” of the retirement investor, and could potentially be used as a guide in their investment decisions. DOL’s press release states that the update would come into play when financial services providers are charging what they consider “junk fees” for advice, which can cut into the funds saved.
An attempt was made by DOL in 2015 to update the definition of “fiduciary,” but fell apart after a circuit court vacated the rule before it could be enforced.
The IRS also recently announced plenty of changes in store for 2024, all part of the SECURE 2.0 Act. The headliner of these changes that will impact the majority of people saving for retirement – the maximum employee contribution for 401(k) retirement plans will increase next year. With a $500 increase from 2023, employees will be able to contribute up to $23,000 each year to their $401(k) plans starting January 1, 2024. The increase will also apply to 403(b) plans and some 457 plans. This hike is much smaller in comparison to the $2000 annual increase between 2022 and 2023. IRAs will also see a max contribution increase of $500 for 2024, raising the annual limit to $7000.
If a plan participant under 59 ½ makes an early withdrawal from their retirement plan now, there’s a 10% penalty attached. Starting in 2024, that fee will be waived for participants borrowing up to $1000 per year for immediate personal or family emergencies or unforeseeable circumstances. 2024 will also see an exception to the penalty for participants making an early withdrawal to escape domestic violence. Effective immediately, withdrawals made by those diagnosed with a terminal illness will also not be subject to the penalty.
The required minimum distribution age will change from 72 to 73 this year. Plan for this to move again, as it’s already cemented that the age will increase in 2025 to 75.
Investors making over $145,000 annually will be considered “high earners,” and will be required to designate catch-up contributions as Roth contributions. This will sting a little bit for older investors who make up a majority of those taking advantage of catch-up contributions. Roth investments are made post-tax, so this may have over-50 participants rethinking their catch-up plan to avoid a higher tax bill.
If you’re a parent, you may have wondered, “What if my child doesn’t need the 529 that we invested in all these years?” There a few reasons that a student may not need to touch or exhaust those funds. They may choose a career path with a shorter educational requirement, receive a full-ride scholarship, or decide that higher ed is simply not for them. For 529 accounts open more than 15 years, the beneficiary can roll up to $35,000 into a Roth IRA over the course of their life. Parents can now breath a sigh of relief that they won’t be penalized if their student finds other ways to pay to further their education after high school.