Unlocking Financial Opportunities: The Art of 529-to-Roth Rollovers Explained by RWM Financial Group

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Hey there, savvy savers! Ready to dive into the nitty-gritty of 529-to-Roth IRA rollovers? The SECURE 2.0 Act has opened up a whole new avenue to shuffle around those unused 529 funds for the benefit of your loved ones’ retirement. Let’s break it down, RWM-style.

So, picture this: you’ve been stashing away in a 529 account, dreaming of a bright college future for your kiddos. Fast forward to the SECURE 2.0 Act, and now you’re thinking, “What if I could turn these leftovers into a retirement nest egg?” Well, guess what? You can!

Starting this year, 2024, the new provision allows you to roll over unused 529 assets (up to $35,000) into the beneficiary’s Roth IRA without facing the dreaded 10% penalty or stirring up any taxable income drama. Great news, right? Especially for those of us wondering what to do with excess 529 funds just hanging around like a third wheel at a party.

But hold up! Before you start envisioning your money making its way to Roth paradise, Brahm Rossiter, our Chief Investment Officer at RWM Financial Group, puts it into perspective. “Transforming unused 529 funds into Roth savings is not just a financial move; it’s a strategic journey towards securing a brighter future. At RWM Financial Group, we believe in empowering individuals to make informed choices that pave the way for financial freedom and generational wealth.

Now, let’s talk limits. You can’t just waltz into 529-town, grab $35,000, and sashay into a Roth party. There are rules, dear friend:

Holding Periods

Your 529 needs to have clocked at least 15 years before the rollover dance begins. No shortcuts allowed! Contributions from the last five years before distributions? Sorry, they’re not invited to this tax-free rollover fiesta.

Annual Limits

Your rollover can’t outshine the annual Roth contribution limit, which is currently $6,500, in 2023. So, if you’re eyeing that $ 35,000 lifetime limit, you’ll be doing it over six years – unless the Roth contribution limit does a little cha-cha upwards in the future.

Ownership

The beneficiary of the 529 must be the proud owner of the Roth IRA and must have earned income equal to the rollover amount. Fair’s fair!

Now, here’s where it gets a bit tricky. These are the rules according to the legislation. The IRS might throw in a plot twist during implementation, and some details are still up in the air. For example, can you switch 529 beneficiaries before a rollover, or does that trigger a brand new 15-year holding period? And who’s footing the bill if things go south? Uncertainty alert!

But fear not! If you’re eyeing this new provision with a hopeful gleam, here’s a checklist to chat about with your planning professional:

Hold Your Horses

If you’ve got a 529 plan, no need to make a move just yet. 2024 is the starting gun, and we’re still waiting for the final rules. Patience is key.

Kiddo’s 529 Game Plan

If you’re thinking of making yourself the beneficiary ninja to sidestep Roth IRA contribution rules, hold on. Let’s wait for the lowdown on the lifetime contribution amount and that 15-year holding period.

Roth IRA for the Win: 9 Game Plan

Regardless of the IRS dance, consider opening a Roth IRA for the beneficiary. Get those retirement savings going when the tax rates are friendly and efficient!

Backup Plans

Got an overfunded 529? Fear not! Switch beneficiaries, use it for educational purposes, tackle student loans, or tap into it for a tax-free scholarship – plenty of options on the table.

In a nutshell, this new 529-to-Roth rollover is like your financial safety net, not the main event. So, keep it in your back pocket, chat with your planning pro, and let’s navigate this new terrain together! Contact RWM Financial Group

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Navigating the 401(k) Adventure: A Friendly Guide to Fiduciary Best Practices with RWM Financial Group

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Hey there, savvy decision-makers at RWM Financial Group! Let’s chat about the nitty-gritty of your 401(k) game plan and why keeping an eye on those investments is a big deal. We get it, steering through the fiduciary responsibility maze can be a bit overwhelming, but fear not – we’re here to guide you with a friendly chat and a sprinkle of expertise.

So, you’ve got this investment committee, right? They’ve got their hands full selecting and keeping tabs on the investment options for the retirement plan. No pressure, but it’s a crucial task. But guess what? You’re not alone! There’s a buffet of resources out there to help you make those informed decisions without breaking a sweat.

Why bother, you ask? Well, staying proactive and clued up on these matters can be your secret weapon against potential legal headaches. Nobody wants to be tangled up in lawsuits about excessive fees or ERISA violations. Trust us, it’s not a fun ride.

Your Fiduciary Responsibilities

Let’s dive into the fiduciary responsibilities for a moment. As a fiduciary, you, the plan sponsor/employer, have a duty to act solely in the best interest of the participants. The Department of Labor says, “Hey, be prudent, diversify those investments, and keep the risk of big losses in check.”

Now, we know it’s a complex dance, and that’s why you might want some dance partners. Cue the 3(21) and 3(38) advisors. The 3(21) buddy is like your co-pilot – offering counsel and guidance without taking the wheel. On the flip side, the 3(38) advisor takes full control of the investment decisions, letting you sit back and relax.

Investment Policy Statement

Let’s not forget the Investment Policy Statement (IPS) – think of it as your GPS for the plan’s investments. It’s your roadmap, ensuring the plan’s goals align with its investment approach. Plus, it’s the committee’s handy tool for evaluating the retirement plan’s performance.

Evaluate, Benchmark, and Assess

Now, when it comes to evaluating, benchmarking, and assessing – it’s like giving your plan a health check. Are those goals outlined in the IPS being met? Is the fee structure reasonable? Time to compare your plan to the cool kids in the market to see how it measures up.

Oh, and setting up a 401(k) plan? We get it, the U.S. tax system can feel like a rollercoaster. But fear not! With the right help, even the smallest business can confidently rock a 401(k) plan. Automation is the name of the game, and a financial professional specializing in these plans can be your sidekick.

What is Fiduciary Liability Insurance?

Let’s talk about fiduciary liability insurance – your plan’s superhero cape. It’s not required, but it’s a smart move. This insurance provides legal protection if someone claims a fiduciary duty breach or mismanagement of the retirement plan. No capes against fraud, though – that’s where the ERISA fidelity bond steps in.

Fiduciary Oversight, Financial Integrity

So, my friends at RWM Financial Group, overseeing a retirement plan is a big deal, but with the right squad of fiduciary experts, including those 3(21) or 3(38) advisors, you’ll be cruising smoothly. A well-managed plan and investment strategy? That’s your ticket to an optimized plan and happy employees reaching their retirement goals.

Contact RWM Need a hand in the 401(k) adventure? Drop us a line! We’re here to answer all your burning questions and help you navigate those fiduciary responsibilities like seasoned pros. Cheers to financial well-being!

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Why Sponsor a 401(k) Plan for Small Business?

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5 Good Reasons To Set Up A 401(k) Plan Even if Your Company is Small

The 401(k) plan is a favorite retirement savings vehicle for Americans. It is estimated that 52% of working Americans work for a company that offers a 401(k) or similar plan. But, while more than 67% of very large companies offer  a plan, just 26% of America’s small business owners offer a 401(k) plan and 74% do not offer any form of retirement benefits. Owners of small businesses may incorrectly assume that 401(k) plans just won’t work for them.  Here’s the reality.1

#1: 401(k) plans make it easier to compete for and keep talent.

Seventy-seven percent of employers believe that offering a 401(k) or similar plan is important for attracting and retaining employees. However, some may be underestimating their importance — fully 81% of workers agree that retirement benefits offered by a prospective employer will be a major factor in their final decision-making when job hunting.

#2: A 401(k) can help owners save for their own retirement

Business owners sometimes hope to fund their own retirement through business profits or the future sale of their business. They may sacrifice personal retirement savings in favor of plowing money back into the business. When the company provides a 401(k) plan for employees, owners may be more likely to contribute on their own behalf, too. The savings in the plan can help the business owner’s ability to retire, even if the company itself does not survive.2

#3: 401(k) plans save the company on taxes. 

A key provision of SECURE Act 2.0, passed in December 2022, allows employers with 1-50 employees to claim a credit of up to 100% of start-up costs for the first three years after adopting a new plan.3 This credit is capped at $5,000 per employer annually (total of $15,000  for the three years). A 50% credit from the SECURE Act of 2019 remains for those businesses with 51-100 employees. There is also an additional tax credit for five years of up to $1,000 per employee equal to the applicable % of eligible employer contributions. This tax credit does not apply to defined benefit plans and there is an exception for employees with wages in excess of $100,000. You may also enjoy a reduction in payroll taxes if employees are taking advantage of the plan — which is a great reason to educate them about its benefits.

#4: Plans are easy to set up and operate…with the right help

401(k) plans are available by virtue of an extremely complex U.S. tax system. It makes sense to feel a little intimidated, especially when you have a business to run. Today, there is a lot of help available to make it possible for even the smallest business to confidently establish and operate a 401(k) plan. The administration can be fully automated, and you can select a financial professional who specializes in these plans to help make sure it benefits employees and the company, within the bounds of all applicable laws.

#5: 401(k) plans help employees retire on time.

Their workplace 401(k) plan may provide an opportunity for employees to connect with a financial professional; for many, this is their only such contact. Along with the plan, contact with a financial professional may help employees gain confidence in their ability to retire. And that is important for at least two reasons. 1) Employees who know they will have enough money to retire are more likely to leave the workforce on time. Thus, they make room for the next generation of employees rather than remaining on the job solely for the paycheck. And 2) employees who are worried about finances are often less productive, less healthy, and more expensive for your other benefits.4

  1. Source: Plansponsor.com ↩︎
  2. https://transamericacenter.org/docs/default-source/retirement-survey-of-employers/tcrs2019_srr_employer_survey_retirment_security_challenge.pdf ↩︎
  3. https://www.irs.gov/retirement-plans-plan-participant-employee/retirement-savings-contributions-savers-credit ↩︎
  4. Source: 401kSpecialist Magazine, 2022. ↩︎

Contact RWM If you haven’t yet established a 401(k) plan, take some time to learn more about the ways it may help you grow your business and work towards your future – and those of your employees. RWM Financial Group would be happy to share more insights.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

RP-0393-0323  Tracking #1-05365579 (Exp. 03/25)

Big Birthdays After 50 – And Why They Matter

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So, you know how kids hit that age where they proudly declare they’re “eleven and a half” or some such? Well, guess what? Once you’re past the big 5-0, those half-birthday vibes start making a comeback. And here’s the twist – these birthdays and “half-birthdays” are not just about adding candles to your cake. Nope, they can seriously shake things up when it comes to your retirement game plan.

Age 50

Alright, let’s kick things off at the big 5-0. If you’re part of certain retirement plans, this is your cue to start making those annual catch-up contributions. Picture this: if you’re rocking a 401(k), 403(b), or 457 plan, you can throw in an extra $7,500 per year in 2024. Got a Simple IRA or Simple 401(k)? You’re looking at a cool $3,500 catch-up contribution. And don’t forget the traditional or Roth IRAs – you can stash away an extra grand annually. Sweet, right?

Age 59½

Now, we’re talking about the age where you can start dipping into your retirement plans without Uncle Sam slapping you with a 10% penalty. Say hello to withdrawals from your IRAs and employer-sponsored plans like the 401(k) and 403(b). Just a heads-up – traditional IRAs, 401(k)s, and the gang are taxed as ordinary income. But hey, no penalties? That’s a win.

Age 62 

So, 62 is the magic number to start cashing in on those Social Security retirement benefits. But hold up – if you’re still grinding away at work, your benefits take a hit. The deal is, they deduct a buck for every two you earn over the annual limit, which is $22,320 in 2024. It’s like Social Security’s way of saying, “We got you, but not all the way.”

Age 65

Hit 65, and guess what’s on the table? Medicare. The folks at Social Security suggest you get on it three months before the big day. Oh, and if you’re already soaking up those Social Security benefits, you’re in for automatic enrollment in Medicare Part A and Part B. No extra paperwork – sounds good to us!

Age 65 to 67

Now, here’s the scoop between 65 and 67. This is when you can start cashing in on the full 100% of your Social Security benefits. But here’s the kicker: the exact age depends on when you blew out your birthday candles. Born in ’55? Full benefits at 66 years and 2 months. Born in ’60 or later? Hold on tight till you hit 67.

Age 73

Fast forward to 73, and it’s time to start taking those required minimum distributions from your traditional IRA and other plans. And get this – you can still contribute to that traditional IRA past 70½, as long as you’re bringing in the bacon.

So, why does all this matter? Well, understanding these milestone birthdays is like having a secret map to navigate your retirement. It’s not just about celebrating another trip around the sun; it’s about making sure you’re on top of things and dodging those pesky penalties. Cheers to knowing when to blow out the candles and when to cash in on the perks! 🎉

As you embark on this next chapter, let RWM Financial Group be your co-pilot. When it comes to preserving your financial future, having a knowledgeable guide makes all the difference.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own, separate from this educational material.

2024 Compliance Calendar

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Stay ahead of deadlines with help from our annual Compliance Calendar. If you have any questions about deadlines or the information requested, please get in touch with us to review today!

Download the 2024 Compliance Calendar

RWM Financial Group is committed to providing solutions and support for yours and your employees’ retirement. Here’s a handy checklist to keep your retirement plan running smoothly:

  • Review plan documents: Ensure all information is up to date and compliant with current regulations. Don’t let any outdated policies slip through the cracks!

  • Communicate with participants: Engage your employees by sharing important updates, educational resources, and reminders about upcoming deadlines. Let’s keep them informed and motivated!

  • Evaluate investment options: Take a close look at your plan’s investment lineup. Are there any adjustments needed to align with participants’ goals? Let’s ensure a diverse and appealing selection.

  • Assess plan fees: Scrutinize the fees associated with your plan. Can any be renegotiated or reduced? It’s time to optimize your plan’s cost-effectiveness!

  • Conduct plan audits: Regular audits are crucial to maintaining compliance and identifying any potential issues. Stay ahead of the game and ensure your plan is in tip-top shape.

  • Enhance financial education: Empower your employees with financial literacy tools and resources. Help them make informed decisions for a secure retirement future.

RWM Financial Group takes pride in our roles as your Plan Advisors; we are dedicated to you, your plan, and your employees. We are here to support you every step of the way.

Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC.

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

Checking Under the Hood

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How to Perform a Six-Step Maintenance Checkup on Your Retirement Plan

Does your retirement plan make curious noises when it travels over a few market bumps? Are you getting enough mileage out of your savings rate? Is your diversification strategy as energy-efficient as it should be? Performing annual maintenance on your 401(k) can help make the road to retirement as smooth as possible. Here’s a six-step checkup that can be performed in just a couple of hours over a weekend.

STEP 1: Review Your Goals and Plans

Each year you should ask yourself if you’re on track to reach your retirement goals. Part of that process is imagining (in detail) what you would like to be doing during that stage of your life. Are your goals and plans realistic? Has your thinking changed at all — and why? The American Savings Education Council (www.asec.org) has a wealth of resources to help you review and adjust your goals and plans as needed, including their “Savings Goal Calculator” and other tools that can help you determine how much money you need to save for retirement.

STEP 2: Maximize Your Contributions

If you’re not contributing the maximum possible to your plan, increase your contributions by at least 1% each year, with a general goal of eventually reaching around 15% of your salary. Try to contribute at least enough right now to get the full employer match (if offered). It’s one thing to read this and say to yourself “yes, I can definitely increase by 1%.” But it’s only going to happen if you stop everything you’re doing right now, log into your account on your recordkeeper’s website and make the change!

STEP 3: Review Your Investment Strategy

Given all the market turmoil over the past few years, including inflation and economic events beyond our control, it’s smart to ask yourself each year if your asset allocation is still appropriate. Or, if your tolerance for risk has fundamentally changed. Your plan recordkeeper likely has a risk tolerance assessment exercise you can access on their website. In addition, consider working with a financial advisor to help you determine if your investment strategy is in sync with your current personal situation.

STEP 4: Rebalance

Rebalancing is the process of adjusting your portfolio’s investments so they match your original allocation. When your portfolio gets out of balance, you may stray from your original risk comfort zone. For example, due to ongoing market volatility, your portfolio may have drifted toward either a more aggressive or conservative allocation than you are comfortable with. Rebalancing keeps your portfolio risk within your tolerance limits.

STEP 5: Check Beneficiaries

Your spouse is automatically the primary beneficiary of your 401k plan. But, if you are divorced, widowed or remarried, you should review your beneficiary designations to make sure the correct person is named. Also, if you want to name someone else (such as a child) as your primary beneficiary, and you are married, your spouse needs to sign a waiver of rights to your 401(k) benefits.

STEP 6: Check on Retirement Plan Changes

Does your retirement plan offer any new plan features, tools, or resources? What can you do to take advantage of these opportunities? Also, be sure you have a copy of the Summary Plan Description for your plan (available for free from Human Resources). The Summary Plan Description defines, in plain language, how your plan works and what its features are.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Kmotion, Inc., 412 Beavercreek Road, Suite 611, Oregon City, OR 97045; www.kmotion.com

©2023 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this newsletter are those of Kmotion. The articles and opinions are for general information only and are not intended to provide specific advice or recommendations for any individual. Nothing in this publication shall be construed as providing investment counseling or directing employees to participate in any investment program in any way. Please consult your financial advisor or other appropriate professional for further assistance with regard to your individual situation.

RP-840-0523 Tracking #1-05376250

Exciting Announcement: Introducing Our New Chief Investment Officer and Operations Team

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We have some thrilling news to share! Brahm Rossiter is stepping into the role of Chief Investment Officer (CIO). Brahm Rossiter will be overseeing all investment strategies and decision-making processes, ensuring the utmost level of expertise and attention to detail in managing your accounts. Brahm will be working with each team member behind the scenes. As always, Brahm is available by phone and in person.

To ensure a seamless transition and uninterrupted day-to-day operations, we’ve assembled a powerhouse team. They will be responsible for handling all administrative tasks, client inquiries, and operational aspects of your accounts. Allow us to introduce you to the members of our operations team:

Jake Taylor

Jake brings a wealth of experience in financial operations and client service. He will be a key point of contact for your account-related inquiries and will work diligently to ensure your needs are met promptly and efficiently.

Marcus Sasaki

Marcus is a seasoned professional with a strong background in investment management. He will play a crucial role in supporting the execution of investment strategies and monitoring market trends to optimize your portfolio.

Kirby Moreno

Kirby is a highly organized individual with a keen eye for detail. She will be responsible for the administrative aspects of your accounts and facilitating smooth operations.

Desiree Jacobs

Desiree is a dedicated professional with extensive experience in business operations. She will work closely with our team to ensure streamlined processes and effective communication, ultimately enhancing your overall client experience.

Rest assured, Brahm Rossiter will lead with unparalleled expertise, and our team will guide you toward financial success.

RWM Financial Group consultation
401K INVESTMENT ADVISORY SERVICES Brahm going over papers

Our team remains dedicated to understanding your unique financial goals and tailoring strategies to help you achieve them.

If you have any questions or concerns regarding this transition, or if you would like to schedule a meeting to discuss your portfolio, please do not hesitate to reach out to us. We are here to address any queries and provide you with the support you need.

We are thrilled about this positive change and the enhanced capabilities it brings to our firm. Thank you for entrusting us with your financial journey, and we look forward to continuing our partnership with you.

Addressing Common Employee Questions and Concerns about 401(k) Plans

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As an employer offering a 401(k) plan, it is important to provide your employees with the necessary information and support to help them make informed decisions about their retirement savings. In this blog, we will address common questions and concerns that employees often have regarding 401(k) plans. By proactively addressing these issues, you can promote employee engagement, boost participation rates, and enhance overall satisfaction with your retirement benefits program.

What is a 401(k) plan, and how does it work?

We’ll start by providing a clear and concise explanation of what a 401(k) plan is and how it functions. We’ll cover topics such as employee contributions, employer matching contributions, vesting schedules, investment options, and the tax advantages of participating in a 401(k) plan.

How much should I contribute to my 401(k) plan?

This section will guide employees on determining an appropriate contribution level based on their individual circumstances and financial goals. We’ll explain concepts like the power of compounding, maximizing employer matching contributions, and the potential long-term benefits of consistent contributions.

What investment options are available in a 401(k) plan?

Employees often have concerns about choosing the right investments within their 401(k) plan. We’ll provide an overview of common investment options such as mutual funds, target-date funds, and individual stocks. Additionally, we’ll emphasize the importance of diversification and the benefits of consulting with a financial advisor for personalized investment advice.

Can I access my 401(k) funds before retirement?

This section will address common questions about accessing 401(k) funds in case of financial emergencies or other unexpected circumstances. We’ll explain the rules and potential implications of early withdrawals, loans, and hardship distributions. It is crucial to educate employees about the potential impact on their long-term retirement savings and encourage them to explore alternative options before tapping into their 401(k) funds prematurely.

What happens to my 401(k) if I leave my job?

Employees often express concerns about their 401(k) funds when changing jobs. We’ll explain the available options, such as leaving the funds in the current plan, rolling them over to a new employer’s plan, or transferring them to an individual retirement account (IRA). By providing clear guidance, employees can navigate these transitions and make informed decisions regarding their retirement savings.

​​What is the difference between a traditional 401(k) and a Roth 401(k)?

Employees may have questions about the distinction between these two types of 401(k) plans. In response, explain that a traditional 401(k) allows pre-tax contributions, reducing taxable income in the year of contribution, while a Roth 401(k) allows after-tax contributions, with tax-free withdrawals during retirement. Discuss the advantages and considerations of each option to help employees determine which is more suitable for their needs.

How can I monitor and track the performance of my 401(k) investments?

Employees may express concerns about tracking the performance of their 401(k) investments. Provide guidance on accessing online portals or tools offered by the plan provider for monitoring account balances, investment performance, and contribution history. Explain the importance of regularly reviewing investment performance and making adjustments as needed to align with long-term goals.

What are the penalties for early withdrawals from a 401(k) plan?

Discuss the penalties associated with early withdrawals from a 401(k) plan. Explain that if funds are withdrawn before the age of 59 ½, they are generally subject to income tax and a 10% early withdrawal penalty. Emphasize the long-term impact of early withdrawals on retirement savings and encourage employees to explore other options, such as loans or hardship distributions, only as a last resort.

Are there any limits on annual contributions to a 401(k) plan?

Inform employees about the annual contribution limits set by the IRS. Explain that for 2023, the limit for employee elective contributions is $19,500, with an additional catch-up contribution of $6,500 for individuals aged 50 and older. Discuss the benefits of maximizing contributions up to these limits to take full advantage of the tax benefits and potential employer matching contributions.

Can I roll over funds from a previous employer’s retirement plan into my current 401(k) plan?

Explain the process of rolling over funds from a previous employer’s retirement plan into the current 401(k) plan. Discuss the benefits of consolidation, such as simplified account management and potential access to a broader range of investment options. Encourage employees to consult with their plan administrator or a financial advisor for guidance on the rollover process.

Final Notes

Addressing common employee questions and concerns about 401(k) plans is essential for fostering a sense of financial security and well-being among your workforce. By providing clear and accessible information, you empower your employees to make informed decisions about their retirement savings. Remember to encourage employees to seek professional guidance from financial advisors and periodically review their retirement strategies to ensure they stay on track towards a financially secure future.

By proactively addressing these questions and concerns, you can create a positive and supportive retirement benefits program that helps your employees achieve their long-term financial goals.

Learn More About RWM

There are many moving parts when designing, implementing, and administering a retirement plan. However, when you focus on the key areas in your initial design or partner with a professional specializing in retirement plans and administration, you can strive to avoid the common challenges and unnecessary costs while helping your employees succeed.

At RWM Financial Group, we help commercial businesses and governmental agencies design and oversee well-managed retirement plans in non-tribal and tribal organizations. Learn more about building a custom, cost-effective strategy that is compliant and promotes success for you and your employees.

This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does the advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

The Inflation Reduction Act’s Impact on 401(k) Plans

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The Inflation Reduction Act (IRA) was signed into law by President Joe Biden on August 16, 2022. It addresses various important topics like healthcare, climate change, corporate taxation, and retirement plans. This blog specifically focuses on how the IRA affects 401(k) plans, providing an overview of the key provisions and offering insights for employers to ensure they comply with the new rules.

Understanding the Inflation Reduction Act:

The IRA was created to deal with the increasing inflation rates and minimize their negative impact on the economy and individuals’ financial well-being. The Act includes specific measures that directly affect retirement savings plans, such as 401(k) plans. It recognizes the importance of retirement planning, especially in an environment with rising prices.

In simpler terms, the Inflation Reduction Act was passed to address inflation’s effects and how it impacts people’s ability to save for retirement. It introduces changes to retirement plans, including 401(k) plans, to help individuals cope with inflation and secure their financial future.

Impact on 401(k) Contributions:

One notable effect of the IRA on 401(k) plans is the adjustment in contribution limits. To preserve the purchasing power of retirement savings, the legislation introduces changes that align with the effects of inflation on the economy. Typically, these changes result in an increase in contribution limits, allowing individuals to save more for retirement and protect their financial security from erosion due to inflationary pressures.

Tax Advantages and Withdrawals:

The IRA maintains the tax advantages of 401(k) plans while introducing adjustments to align with changing economic conditions. Individuals can continue to enjoy tax-deferred growth on their contributions, and the benefits of pre-tax contributions and potential tax-free growth remain intact. However, the Act may introduce changes to the tax treatment of withdrawals to strike a balance between preserving retirement savings and addressing inflationary pressures. This may include penalties for early withdrawals and the potential expansion of options such as Roth 401(k) plans, which offer tax-free withdrawals.

Additional Minimum Tax on Corporate “Book Income”:

The Act introduces an additional minimum tax of 15% on corporate “book income” for companies with income exceeding $1 billion. To determine if a company meets the “book income test,” its average annual adjusted financial statement income (AFSI) for the past three taxable years must exceed $1 billion. Corporations must exclude qualified retirement plan asset and income changes when calculating AFSI. Employer retirement plan deductions for 401(k) contributions and plan-related expenses should be subtracted, but if 401(k) assets revert back to the employer, they must be included in the AFSI calculation.

Additional Tax on Corporate Stock Repurchases:

The Act imposes a 1% excise tax on the fair market value of corporate stock repurchases that are not contributed to a 401(k) plan. When a company repurchases its stock from shareholders for cash, the excise tax applies. However, if the repurchased stock is contributed to an employer-sponsored retirement plan like a 401(k), the excise tax does not apply.

Compliance Considerations for Employers:

Employers, particularly large corporations, need to understand how to calculate “book income” and exclude relevant 401(k) plan expenses and deductions to ensure compliance with the additional minimum tax provisions. It is crucial to accurately calculate AFSI and evaluate potential tax consequences. Employers engaging in stock repurchases should be aware of the excise tax implications and carefully assess their strategies.

Financial Planning Considerations:

The IRA’s impact on 401(k) plans highlights the importance of thoughtful financial planning. Individuals should reassess their retirement savings strategies considering the adjustments to contribution limits, tax treatment, and potential penalties. Maximizing savings potential and taking advantage of tax benefits require collaboration with financial advisors to determine appropriate contribution levels aligned with long-term financial goals. Retirees must understand potential changes in withdrawal rules and engage in comprehensive retirement planning to navigate complexities and make informed choices.

Final Notes

The Inflation Reduction Act’s impact on 401(k) plans represents a significant development for retirement savings in an inflationary economic environment. By adjusting contribution limits, preserving tax advantages, and addressing withdrawal rules, the legislation seeks to protect individuals’ long-term financial security. As with any major policy change, it is vital for individuals to stay informed, evaluate their financial strategies, and seek guidance from professionals to optimize their retirement planning in light of the IRA’s provisions. By staying proactive and adaptable, individuals can navigate the evolving landscape and ensure a solid foundation for their future retirement.

Learn More About RWM

There are many moving parts when designing, implementing, and administering a retirement plan. However, when you focus on the key areas in your initial design or partner with a professional specializing in retirement plans and administration, you can strive to avoid the common challenges and unnecessary costs while helping your employees succeed.

At RWM Financial Group, we help commercial businesses and governmental agencies design and oversee well-managed retirement plans in non-tribal and tribal organizations. Learn more about building a custom, cost-effective strategy that is compliant and promotes success for you and your employees.

This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does the advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

How to Stay Compliant with Discrimination Testing ADP/ACP: 401(k) and 401(m)

Discrimination testing is a crucial component of maintaining compliance with Internal Revenue Service (IRS) regulations for 401(k) and 401(m) plans. These tests are performed to ensure that the plans do not unfairly benefit highly compensated employees (HCEs) at the expense of non-highly compensated employees (NHCEs). Failure to comply with IRS regulations can result in significant penalties for the plan sponsor.

ADP Test

The average deferral percentage (ADP) test is used to ensure that HCEs do not contribute a disproportionate amount to the plan. Under the IRS regulations, HCEs are subject to limitations on the amount they can contribute to the plan, based on the amount contributed by NHCEs. The ADP test calculates the average percentage of salary that HCEs and NHCEs contribute to the plan, and if the difference between the two is too large, the plan may be considered discriminatory.

If the plan fails the ADP test, HCEs may have to return some of their contributions to the plan. Therefore, it is crucial for employers to regularly perform discrimination testing to ensure compliance with IRS regulations and avoid any potential penalties.

ACP Test

In addition to the ADP test, the average matching contribution percentage (ACP) test is used for 401(m) plans. These plans require the employer to match a portion of the employee’s contributions, and the amount of the match must be the same for all employees. However, the plan can be discriminatory if the match disproportionately benefits HCEs.

The ACP test compares the average matching contribution percentage of HCEs to that of NHCEs. If the difference between the two is too large, the plan may be considered discriminatory, and HCEs may have to return some of their matching contributions. Like the ADP test, it is crucial for employers to regularly perform discrimination testing to ensure compliance with IRS regulations and avoid any potential penalties.

Automated Discrimination Testing

Collection and Storage of Data

Automated discrimination testing involves the collection and storage of data necessary for the ADP/ACP test. This information is crucial for calculating contributions and identifying highly compensated employees (HCEs).

Real-Time ADP/ACP Test

Automated discrimination testing allows for real-time ADP/ACP testing to ensure that the plan remains compliant with IRS regulations. This helps plan administrators to quickly identify issues and take corrective action.

Delivery of Annual ADP/ACP Compliance Testing Package

Automated discrimination testing provides an annual ADP/ACP compliance testing package for plan administrators. This package contains information on compliance requirements and test results.

Quarterly ADP/ACP Testing and Corrective Action

Automated discrimination testing includes quarterly ADP/ACP testing to ensure that the plan remains compliant throughout the year. If issues are identified, corrective action can be taken immediately.

Monitoring of Elective Deferrals

Automated discrimination testing includes monitoring of elective deferrals to ensure that they meet IRS regulations. This helps to identify and correct any issues before they become problematic.

Top-Heavy Testing

Automated discrimination testing includes top-heavy testing, which ensures that the plan does not favor highly compensated employees. This helps to maintain compliance with IRS regulations.

Identifying HCEs

Automated discrimination testing helps to identify highly compensated employees (HCEs) by using data such as salary and ownership percentages. This information is used to calculate contributions and ensure compliance with IRS regulations.

Coverage Testing for Controlled Groups

Automated discrimination testing includes coverage testing for controlled groups, which ensures that all employees within the group have equal access to the plan. This helps to maintain compliance with IRS regulations.

Compensation Definition Testing

Automated discrimination testing includes compensation definition testing, which ensures that compensation is properly defined and calculated for the ADP/ACP test. This helps to maintain compliance with IRS regulations.

Cross Testing

Automated discrimination testing includes cross testing, which helps to identify whether contributions made to one group are proportionate to the contributions made to other groups. This ensures compliance with IRS regulations and helps to maintain fairness among plan participants.

How to Stay Compliant with Discrimination Testing ADP/ACP: 401(k) and 401(m)

Staying compliant with Discrimination Testing ADP/ACP for 401(k) and 401(m) plans is critical to avoid penalties and maintain the plan’s tax-qualified status. Here are some tips to stay compliant:

Regular Discrimination Testing: Conduct regular ADP/ACP testing, preferably quarterly, to identify any discrepancies between HCEs and NHCEs’ contribution rates.

Corrective Action: If the plan fails the ADP/ACP test, take corrective action to bring the plan into compliance. Corrective action can include returning excess contributions, adjusting contribution rates, or implementing a qualified non-elective contribution (QNEC) to meet the minimum contribution requirements.

Monitor Elective Deferrals: Keep a close eye on the elective deferrals made by HCEs to ensure they don’t exceed the annual contribution limits set by the IRS.

Top-Heavy Testing: Perform annual top-heavy testing to ensure the plan doesn’t favor HCEs and meets the minimum contribution requirements for NHCEs.

Coverage Testing for Controlled Groups: If the plan is part of a controlled group, perform coverage testing to ensure that all eligible employees have access to the plan.

Compensation Definition Testing: Ensure that the compensation definition used in the plan document is consistent with the IRS’s definition of compensation for ADP/ACP testing.

Cross Testing: Consider implementing cross-testing to allocate contributions based on projected benefits rather than contribution percentages. This can help the plan meet the minimum contribution requirements for NHCEs while still providing meaningful benefits to HCEs.

By following these tips, plan sponsors can help ensure their 401(k) and 401(m) plans remain compliant with ADP/ACP testing requirements and avoid costly penalties.

Final Notes

In conclusion, discrimination testing is a necessary step to ensure that 401(k) and 401(m) plans are in compliance with IRS regulations. The ADP and ACP tests are used to prevent plans from unfairly benefiting HCEs, and failure to comply with these regulations can result in significant penalties for the plan sponsor. Therefore, it is essential for employers to regularly perform discrimination testing and take corrective action as needed to avoid any potential penalties.

Any Questions?

If you are a plan administrator or employer, staying compliant with IRS regulations for 401(k) and 401(m) plans is crucial. Regular discrimination testing is essential to ensure that your plan is not discriminatory and to avoid any potential penalties.

At RWM Financial Group, we understand the importance of compliance and can help you navigate the complexities of discrimination testing. Our team of experienced professionals can assist with automated discrimination testing, monitoring of elective deferrals, and quarterly testing and corrective action.

Contact us to learn more about our services and how we can help you stay compliant with IRS regulations for your 401(k) and 401(m) plans. Don’t wait until it’s too late, contact us today to have our team review your current retirement plan.