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10 Big Changes to Retirement Accounts Due to New 401(k) and IRA Rules

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10 changes to retirement accounts due to 401(k) and IRA rules.

Description: A graph showing the changes to IRA and 401(k) accounts due to new rules.

The development of 401(k) and IRA rules has caused a lot of changes in retirement accounts. There are now Roth SIMPLE and SEP IRAs, student loan matching contributions, and higher contribution limits. A SEP-IRA can be established by sole proprietors, partnerships, and corporations, including S corporations. The advantages of the SEP begin with the ability to contribute more than the traditional IRA contribution limit. Also known as a beneficiary IRA, an inherited IRA is an account that can be funded from any IRA, including traditional, Roth, SIMPLE and SEP-IRAs. The ability to do 529 plan to Roth IRA rollovers goes into effect January of 2021.

Before the passing of the Act, SIMPLE IRAs and SEP IRAs could not be designated as Roth IRA. This provision is in effect for taxable years beginning after December 31, 2020. One advantage to maximizing IRA contributions for the year is that SEP and SIMPLE IRAs have more generous 2022 contribution limits. The amount that can be contributed to a SEP IRA is 25% of the employee’s compensation, up to a maximum of $58,000, or $64,500 if the employee is age 50 or older.

The IRS has also increased the required minimum distributions (RMDs) age from 70 ½ to 72. This means that the investor must take RMDs, such as a traditional IRA, SEP IRA, or SIMPLE IRA, or an employer-sponsored retirement plan, such as a 401(k) plan, from age 72 to 73. This investor’s IRA contribution creates an income tax deduction for the current year and also postpones the taxation of any investment gains until the investor takes a distribution from the IRA.

I used to fund a SEP IRA, which is similar to a traditional IRA in that contributions go in on a pre-tax basis and withdrawals are taxed in retirement. The SEP IRA is different because it has higher contribution limits and the employer can contribute for the employee. This makes it an attractive option for employers because they can deduct their contributions as a business expense.

The 10 big changes to retirement accounts due to new 401(k) and IRA rules include:

  1. SEP IRAs and SIMPLE IRAs now have Roth options

  2. 529 plans can now be rolled over to a Roth IRA

  3. Higher contribution limits for SEP and SIMPLE IRAs

  4. Required minimum distributions (RMDs) age has been increased from 70 ½ to 72

  5. The ability to designate SEP IRAs and SIMPLE IRAs as Roth IRA

  6. Beneficiary IRAs can be funded from any type of IRA

  7. Employer contributions to SEP IRAs are deductible as a business expense

  8. Taxation of investment gains is postponed until the investor takes a distribution from the IRA

  9. Income tax deduction for the current year for IRA contributions

  10. Traditional IRA contributions go in on a pre-tax basis

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