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A new federal law can help you save more for retirement

By May 17, 2023No Comments

(This column originally appeared in the Philadelphia Inquirer)

The Secure 2.0 Act, which became law late last year, contains many provisions to make it easier for both workers and their employers to save money for their retirement. A big part of that legislation made changes to Roth 401(k) and Roth Individual Retirement Accounts (IRAs) accounts.

If you’re a small-business owner, you should be taking advantage because Roth accounts offer a tax-free way to build retirement savings. Roth accounts can also be a powerful benefit to offer your current (and prospective) employees. Almost half of U.S. workers are not saving enough for retirement, according to the U.S. Census Bureau. The Secure Act 2.0 gives workers more options to save for retirement than what they’ve ever had in the past.

Here’s what small-business owners need to know.

A 401(k) is a type of corporate retirement plan where business owners and their employees can get a tax deduction when they save for retirement.

An IRA is in an individual retirement plan where you can get a tax deduction when you save for retirement.

The major difference between Roth retirement accounts and traditional retirement accounts is when your money gets taxed — either before you save it for retirement, or after you withdraw it from the fund.

With a traditional 401(k) or Individual Retirement Account (IRA), contributions, and any income or gains earned over time, are taxed when funds are withdrawn in the future.

However, both a Roth 401(k) for your company and a Roth IRA allow individuals and business owners to save for retirement using income that’s already been taxed. The big benefit for putting money into a Roth account is that, because it’s taxed later, it will grow tax-free forever and with no penalties on withdrawal.

“It’s a great vehicle for savings, particularly when markets are down as they’ve been,” said Sean Balliet, a partner at Baratz & Associates in Marlton. “If you invest in a Roth and your investments grow, you can take advantage of all that appreciation without paying taxes.”

Mitchell Gerstein, a senior tax adviser at Isdaner & Co. in Bala Cynwyd, says that the decision to put money into a Roth account depends on when you want to pay your taxes.

“If you feel that your tax rates are going to be lower in the future, then it may be better to defer your income in a traditional 401(k) or IRA plan,” he said. “But if you think tax rates will be higher in the future, then you can pay your taxes now and then put your after-tax income into a Roth will it grow tax-free. It’s a personal financial strategy.”

Individuals can contribute up to $6,000 between either a traditional IRA and a Roth IRA with additional “catch-up” contributions allowed for people over 50 years old. However, there are limits to those contributions based on an individual’s income.

If your business has a traditional 401(k) plan and you also start a Roth 401(k) plan, then you and your employees can make up to a combined $22,500 in pretax contributions in 2023 and, thanks to new provisions in Secure 2.0, your company can match their contributions to either plan or make an elective contribution for a maximum combined employer-employee contribution of $66,000.

Secure 2.0 also allows employers to match an employee’s student loan payments with a contribution to either plan and, like an IRA, employees over the age of 50 can put away even more with additional “catch-up” contributions.

Secure 2.0 also allows other small-business retirement plans to accept Roth contributions. Employees who may have overfunded their 529 college savings plans can also rollover up to $35,000 to a Roth retirement account thanks to the new legislation.

“There are now many ways to fund both yours and your employees’ Roth accounts,” said Balliet. “There’s much more flexibility than before.”

Individuals are allowed to begin taking money out of their traditional 401(k) and IRA savings at the age of 59½.

However, there are Required Minimum Distributions (RMDs) that you consider. RMDs are minimum amounts that IRA and retirement plan account owners generally must withdraw annually starting with the year they reach age 72 (or 73, if you reach age 72 after Dec. 31, 2022, or 75, starting in 2033). Failing to make the minimum withdrawals (and pay taxes) can result in significant penalties.

By comparison and thanks to the Secure 2.0 Act, Roth accounts will not havethis requirement after 2024, so you can leave your money in these accounts for as long as you’d like.

“Because the markets are down, and these new changes, some of my clients are taking early distributions from their traditional retirement accounts and rolling those funds over to Roth accounts,” said Gerstein. “This way they can pay their taxes now and then set themselves up to grow their retirement funds tax-free going forward.”

Secure 2.0 has opened up more retirement choices, but that doesn’t mean these decisions are easy. Using an expert is strongly recommended.

Both Gerstein and Balliet agree that setting up a Roth 401(k) isn’t complicated, but it’s not something a business owner can do on their own. You’ll want to consult a tax specialist to confirm the advantages for both you and your employees and you’ll need to talk to a wealth manager or financial planner to get help setting up your Roth plan.

There are investment decisions, fiduciary responsibilities, tax filings, regulatory testing, and fees required every year. But for many, the benefits of these after-tax accounts outweigh the costs.

“Roth accounts provide a real opportunity for long-term wealth and tax-free growth,” said Balliet. “We’re strongly encouraging our clients to consider these for their businesses.”

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