In recent years, significant changes to retirement rules and tax laws have emerged, reshaping the landscape for tax planning and retirement savings strategies. Key regulations set to take effect in 2024 and 2025 will influence a range of stakeholders, including high-earners, employees, retirees, and individuals inheriting retirement accounts. This summary highlights six newly introduced rules that all taxpayers should familiarize themselves with as they navigate their retirement finances in the coming years.
Starting in 2026, the ability of high earners to make pre-tax catch-up contributions will virtually cease. Under the Secure Act 2.0, employees aged 50 and older will only be permitted to direct such contributions to after-tax Roth accounts, and this limitation applies to those individuals earning more than $145,000 (indexed for inflation) in the past year with their employer. This shift could present a unique planning opportunity for older workers who change jobs, allowing them to continue making pre-tax contributions for an additional year or two before reaching the earnings threshold. While this is a significant change that affects employers and older employees, it primarily impacts those in their peak earning years who are not able to exclude substantial amounts from their taxable income.
If you are a non-spouse beneficiary of an IRA inherited from someone who passed away after they reached the Required Minimum Distribution (RMD) age, be aware that you may be required to start taking distributions by the 2025 tax year. The IRS has solidified plans that necessitate annual RMDs for such beneficiaries. Unlike situations where the account owner had not yet reached the RMD age, those inheriting accounts from deceased individuals who did have to begin distributions must ensure the account is zeroed out within 10 years. Navigating these new inherited IRA rules can be intricate, thus it is advisable for beneficiaries to consult with financial advisors to understand their specific obligations.
Surviving spouses of deceased individuals can now take advantage of newly clarified rules concerning inherited IRAs. Under existing law, spouses have the option to treat an inherited retirement account as if it is their own, which opens up favorable tax planning avenues. Particularly for survivors having RMDs due to begin in 2024, they now have new options to calculate these distributions such that the methodology may yield lesser forced withdrawals. By using the more advantageous uniform lifetime table instead of the single life table when opting to be treated as the decedent, spouses can effectively manage their required withdrawals in a way that aligns better with their financial circumstances.
Another beneficial change allows tax-free rollovers from a 529 college savings plan to a Roth IRA. This newly established provision, effective in 2024, permits individuals to shift surplus funds from a 529 plan without incurring penalties, up to a lifetime cap of $35,000. There are also annual limits that align with IRA contribution ceilings, and the transaction must comply with specific rules, such as requiring that the 529 account has been active for at least 15 years. Importantly, contributions and earnings made within the last five years are ineligible for rollover. This flexibility ultimately serves to provide enhanced options for individuals seeking to repurpose educational funds toward retirement savings.
In another significant development, Roth 401(k) accounts will no longer be subject to required minimum distributions (RMDs) throughout the account holder’s life after 2024. While previously only Roth IRAs enjoyed this tax benefit, employees with funds remaining in a Roth 401(k) plan do not need to take mandatory withdrawals, potentially allowing their investments to grow tax-free for an extended period. However, it’s critical to note that this change does not inherently extend to beneficiaries of Roth 401(k) plans, unless all funds in the account are Roth assets, which also invoke the 10-year distribution rule. Spouses may find more options available to them under specific plan guidelines.
Lastly, the emergence of increased Roth contributions in SIMPLE and SEP IRAs marks another noteworthy trend. Since 2023, employers have had the flexibility to offer customer matching contributions and non-elective contributions in Roth terms. This option broadens the funding avenues for employees, allowing them to choose after-tax Roth options, adjusting to shifting employee preferences for retirement savings. However, it is essential for employees to be aware that any employer contribution to Roth accounts will proportionately count as taxable income in the respective tax year. With the ever-evolving nature of tax regulations, it is evident that staying informed about these policies is crucial for effective retirement planning and compliance.
As the regulatory environment continues to shift, following these changes closely is critical for individuals and financial planners alike. The winding down of provisions from the Tax Cuts and Jobs Act at the end of 2025, along with these newly implemented rules, underscores the importance of dynamic tax strategies and ongoing financial education. Taxpayers would do well to remain vigilant and proactive in adapting their retirement plans to harness available benefits while minimizing potential tax impacts and compliance issues in the years ahead.
