With the start of a new year — and the approaching tax season — it’s timely to evaluate tax and retirement law changes resulting from recent legislation. It’s also the perfect time for advisors to let their clients know what these changes mean for them. Let’s dig in!
The recent Consolidated Appropriations Act for 2023 (the “CAA”), with its inclusion of Secure 2.0, contained several provisions affecting 529 and ABLE Plans. There are changes to celebrate generally, but in most cases the CAA’s impact won’t be seen for some time. In addition, its 529 provisions come saddled with several limiting characteristics. Some of the retirement provisions, however, are available sooner and could be an important component of an individual or business owner’s financial plan.
Uses for 529 accounts have expanded considerably in recent years, and the CAA continued this trend. Beginning January 1, 2024, monies from a 529 account can be transferred tax-free to a Roth IRA. While it would seem that this provision could help jump start an individual’s Roth IRA savings, it comes with stipulations.
First, the 529 account has to have been maintained for at least 15 years. Second, there are a number of limitations on the amount of the rollover:
- You cannot rollover contributions (including earnings thereon) that have been made in the last five years.
- The beneficiary must have includible income at least equal to the rollover amount.
- Annual rollovers are still limited by the beneficiary’s yearly IRA contribution limits, minus any other IRA contributions they have already made.
- There is a lifetime rollover limit of $35,000.
- The beneficiary of the 529 and the Roth IRA must be the same individual.
While not effective for another year, these changes may be particularly helpful for parents or grandparents who have 529 accounts for children no longer pursuing higher education. Rather than withdraw the 529 money for non-qualified expenses, which could lead to a 10% tax penalty on earnings, those 529 funds can now be given new life in an IRA. After all, even if college is no longer in the picture, retirement always is.
ABLE (Achieving a Better Life Experience) programs have good reason to celebrate: A long-fought battle to raise the age of ABLE eligibility was finally won. Currently, individuals are only eligible to open an ABLE account if their have a disability that occurred before age 26. The CAA increases this limit to age 46, growing the ABLE-eligible population by an estimated 75%. This makes ABLE accounts available to a projected six million additional people, including one million veterans with disabilities. (Source: The National Association of State Treasures’ Aug. 23, 2021 memorandum “The Need to Pass S.331/H.R. 1219 The Able Adjustment Act,” found here on pp. 32-33).
Although this change is cause for excitement, it’s not cause for urgency as the age adjustment does not go into effect until January 1, 2026. That said, the change means that advisors can now discuss ABLE Accounts with a much broader cohort of clients — including, for instance, veterans with disabilities and individuals with traumatic injuries that occurred after age 26. A number of mental illnesses also present in middle-age, as do a host of rare and terminal diseases. The ABLE doors will open to all these new groups in January 2026. In addition, parents or grandparents of adults with disabilities may now be able to work an ABLE account into their financial plan, even though the option evaded them under previous law.
Employer-sponsored retirement plan revisions
The Secure 2.0 components of the CAA bring a multitude of improvement for an employer’s retirement plan options. Every advisor should take the time to understand those positive changes, which are beyond the scope of this piece. On a related note, however, State-level retirement initiatives continues to expand. Broader availability enables more employers to consider adopting this type of plan for their employees.
In particular, financial advisors with business clients in California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, New Jersey, New York, Oregon and Virginia should take note: State Auto-IRAs are either here or are coming soon.
These programs generally require employers of a certain size to automatically enroll eligible employees in an IRA program run by their respective states unless the employer offers its employees a qualified retirement plan. In creating these programs, each state’s mission is to ensure that employees have access to workplace retirement plans: if businesses don’t offer one, then in most cases they will have to participate in the state’s program.
This creates an opportunity for advisors to help business clients identify the best options for their employees. In many instances, small employers have not established a retirement plan for their employees for any number of reasons, most often cost. In most of the states listed above, it either is or will be mandatory for many business owners to offer a retirement plan. These state auto-IRAs will enable employers to facilitate enrollment at no cost and eliminate fiduciary responsibility concerns often incumbent with employer-sponsored retirement plans. Your clients will want to become acquainted with the program offered by their state to meet this requirement.
Business owners that already offer employer-sponsored plans will see a number of positive provisions, including but not limited to the ability to offer emergency savings accounts in defined contribution plans, the preservation of income through the increase of the limit for purchase of a qualified longevity annuity contract, and fewer service years required for some plan types. In addition, 401(k) plans will see some administrative and participation modifications as well. Advisors should review these CAA changes to determine what may make the most sense for their business-owner clients.
Individual retirement account revisions
The CAA has also amended various IRA regulations to preserve and expand the ability of these tools to provide income. Perhaps the most widely publicized is the increase of the RMD age from 72 to 75.This change has implications for a variety of clients: those who want to postpone distributions with an eye towards using the funds for a longer period of time and those who want to minimize distributions for tax and estate planning purposes. Individuals will find that catch-up contribution levels have also increased and are now indexed annually. Increases in catch-up contributions impact not only IRAs, but other individual account plans as well.
Overall, the CAA provides interesting updates for investors in 529, ABLE and retirement plans. State legislation for Auto-IRAs continues to take hold, with more states planning for or launching Auto-IRA programs every year. With these changes in place, 529, ABLE and State Auto-IRA Programs will continue to offer the most compelling ways to save for education, disability expenses and retirement. Advisors will want to set a timetable for the effective date of the CAA provisions so that clients can evaluate the importance of these changes to their financial futures.
Andrea Feirstein is the founder and CEO of AKF Consulting, a leading SEC- and MSRB-registered municipal advisor to public administrators of 529, ABLE and state-run retirement programs. Ellen Breslow and Juliana Crist are senior consultants with AKF Consulting. The firm works with state governments and public entities nationwide to structure programs that help people save for education, disability-related expenses and retirement. Andrea invites you to contact her (firstname.lastname@example.org) if the State-run Investment Programs in this article present any opportunities for your clients.