Good news on the IRA front may be dampened when employees confront the complexity that characterizes IRAs. Plan Sponsors can use their educational options to help employees learn why IRAs can help employees create more robust retirement options.
Some changes to IRAs in the Secure Act 2.0 may have brought employees to think about how they may want to incorporate IRAs into their retirement savings plan. Towards that end, Plan Sponsors may want to offer employees a few key details on why IRAs can benefit their savings.
First, as to the new changes brought by the Secure Act 2.0 they’re all good news. Employer-sponsored Roth IRAs won’t have minimum distributions after 2024. This removes the need to roll over Roth 401(k)s to Roth IRAs to avoid those required minimum distributions. Not needing to roll over accounts makes it easier for employees closer to retirement to consider adding IRAs to their retirement savings plans to help them increase the amount of savings they currently set aside each year. Speaking of catch-up contributions, this also impacts the amount of money that can be tax-free at retirement time. Secure 2.0 also allows employer matching contributions to be directed to Roth 401(k)s instead of traditional ones.
Good news on the IRA front may be dampened when employees confront the complexity that characterizes IRAs. Plan Sponsors can use their educational options to help employees learn why IRAs can help employees create more robust retirement options. Some confusion may have started for employees around Roth IRAs, which are often suggested to younger investors. But these suggestions may have lost the function of IRA rather than the focus of it.
Roth IRAs are the mirror image of traditional ones. In a Roth IRA, the money you put into the investment has been taxed, but the interest is tax free (it isn’t taxed as income), provided you abide by the required rules and regulations. Even better, the tax rate is established when you contribute, not later when you withdraw as with other investment products. Younger investors often meet the income limits and can benefit from the longer time period – e.g., capturing the lower tax rate. However, the name of the investment product may have confused employees who weren’t ready to tackle the complexity of them.
Many younger employees are also encouraged to open Roth IRAs in place of emergency funds. While emergency funds should be the first savings bucket to fill, losing the impact of compounding interest by focusing solely on emergency funds can harm employees in the long term. Roth IRAs, based on their ability to grow tax free, can be used in an emergency without paying a penalty for withdrawal, so long as all rules are met, unlike traditional IRAs or 401(k)s. A Roth IRA could even be used to help purchase a home for first time buyers.
In addition to focusing on the tax-advantaged status of Roth IRAs, Plan Sponsors may want to help employees understand that IRAs qualify for different protection than other retirement savings products. For those investors who worried about banks that were too big to fail (who then failed in 2008/2009) and that worry prevents them from investing, they may take comfort in the insurance coverage through SIPC and FDIC. Unlike other investments, FDIC covers up to $500,000 on all investments in IRAs.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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