Recently, Congress enacted the SECURE 2.0 Act, which encompasses more than 90 amendments affecting a variety of retirement savings arrangements. These modifications will implement between 2023 and 2027. A significant change involves raising the age for Required Minimum Distributions (RMDs).
The age has been increased from 72 to 73 starting in 2023, with plans to eventually increase it to 75. This extension is intended to grant retirees greater flexibility but introduces tax considerations and practical complications. Additionally, the Act has delayed the final regulations concerning inherited IRAs until 2025.
During this time, there will be no penalties for failing to take RMDs from certain inherited IRAs from 2020 to 2023. The penalty for failing to take an RMD has been lowered from 50% to 25%, and under certain circumstances, it could be as little as 10%. Starting in 2024, RMDs will not be mandated for Roth 401(k) accounts in employer-sponsored plans, putting them on par with Roth IRAs, which are exempt from RMD requirements.
Employers now have the option to provide minor financial incentives to promote employee involvement in retirement programs. Beginning in 2024, the Act allows for early “emergency” withdrawals of up to $1,000 from retirement funds without the usual 10% penalty. The SECURE 2.0 Act boosts catch-up contribution limits starting in 2025, permitting contributions as high as $10,000 or 50% above the standard catch-up limit for individuals aged 60 to 63.
For high-income individuals who are 50 or older, all catch-up contributions must be made on a Roth basis beginning in 2026.
Changes to retirement savings regulations
As of 2024, employers may now make matching contributions to employees’ retirement accounts based on their student loan repayments.
The Act further permits restricted rollovers from 529 plans to Roth IRAs commencing in 2024. There are strategies available to mitigate your RMD and lessen tax impacts. Performing Roth conversions can decrease future RMDs by reducing your account’s balance.
Qualified Charitable Distributions (QCDs) contribute toward your RMDs while being excluded from income assessments. If you remain employed, the 401(k) plan provided by your employer might not necessitate RMDs. The IRS has issued its final regulations regarding RMDs for inherited IRAs under the 2020 Secure Act.
Beneficiaries who are not spouses must deplete their inherited IRA accounts within ten years following the death of the original account owner. Annual RMDs are mandated for nonspouses if the original account owner had commenced RMDs before passing away. To alleviate confusion, the IRS suspended annual RMDs for the years 2021 through 2024.
However, these RMDs must be executed starting in 2025, with no penalties for past due years. Careful planning of tax-efficient withdrawals from inherited IRAs is crucial. Consider withdrawing larger sums annually to take advantage of lower tax brackets and avert a substantial tax burden in the final year.
Current IRA holders who intend to leave assets to nonspousal beneficiaries may consider converting traditional IRA savings to a Roth IRA, thereby escaping RMD obligations.
