by Daniel Kittell | Accounting News, News, Newsletter, Retirement, Retirement Savings
If you’ve been sleeping on the Roth 401(k), it’s time for a second look. Yes, they used to come with that inconvenient drawback known as the Required Minimum Distribution (RMD), where you had to withdraw money on a set schedule, whether you needed it or not. But with the implementation of the SECURE 2.0 Act, RMDs are no longer required. Add to this a new rule for catch-up contributions, and Roth 401(k)s just became much more attractive, especially for high earners.
No RMDs Means More Control
Before this change, the IRS required you to start withdrawing money from your Roth 401(k) once you hit a certain age, which forced retirees to pull funds out of an account that would otherwise keep growing tax-free.
Now that both Roth IRAs and Roth 401(k)s are free from RMDs, they’re on a level playing field. This gives you control. If you want to leave your money in the account and let it grow, you can. You have the freedom and flexibility to time withdrawals based on your needs, not a government schedule.
Key Differences Between Roth 401(k) and Roth IRA
Both accounts offer tax-free growth and tax-free withdrawals in retirement. But they are not identical, and the differences are important.
With a Roth IRA, you can only contribute up to $7,500 annually in 2026 (or $8,600 if you’re 50 or older). There’s also an income limit. For 2026, the limit is $153,000 for single filers and $242,000 for joint filers. If you earn too much, you’re not eligible to contribute at all.
A Roth 401(k) doesn’t have those restrictions. The contribution limit is $24,500 in 2026, and there is no income limit.
So for higher earners, the Roth 401(k) is the more accessible option.
A New Rule for Catch-Up Contributions
As of January 1 of this year, under the SECURE 2.0 Act, catch-up contributions for employees who are 50 or older and earn over $150,000 must go into a Roth 401(k). You can no longer direct those extra contributions into a traditional 401(k). That means paying taxes now on those catch-up contributions instead of later.
This might feel constricting for some people, but it’s not a bad deal in the long run. Yes, you’ll pay taxes on contributions now, but the growth and withdrawals remain tax-free.
Why This Matters for High Earners
Put it all together and the Roth 401(k) starts to look like the better option for high earners. You can contribute more than a Roth IRA allows, and you won’t be excluded due to income limits. Your money grows tax-free, and when you withdraw it, you don’t owe taxes on the gains. This can be significant if your balance grows over decades.
Then there’s the question of future tax rates. Many people assume they’ll be in a lower tax bracket in retirement, but when you factor in required withdrawals, Social Security income, and other assets, this isn’t always the case. Some retirees may even end up in higher tax brackets. A Roth 401(k) helps avoid that risk.
To recap, no RMDs, higher contribution limits, and no income restrictions make Roth 401(k)s a strong option. And now, if you’re a high earner making catch-up contributions, you’ll be in a Roth account whether you planned for it or not. Hopefully, now you can start to see why that’s actually a good thing.
by Amanda O'Brien | Accounting News, News, Newsletter, Retirement, Retirement Savings
A 401(k) is often thought of as a set-it-and-forget-it kind of account—set a contribution amount, bank on a company match, and let the market do its thing. But if you haven’t checked in on your plan lately, you might be missing out on some significant new features.
Thanks in part to the SECURE Act 2.0, a handful of updates are giving retirement savers more flexibility, more control, and more ways to grow their money. Whether you’re just starting out or racing toward retirement, here are some under-the-radar 401(k) features worth knowing about.
Super Catch-Up Contributions
Starting this year, if you’re between the ages of 60 and 63, you can contribute an extra $11,250 to your 401(k) beyond the standard catch-up amount ($7,500 for workers over 50). This is due to a provision in the SECURE Act 2.0, and it gives late-career workers a valuable second wind to boost their savings.
Easier Access to Hardship Withdrawals
Hardship withdrawals have always been part of the 401(k) landscape, but the SECURE Act 2.0 made the process simpler. The updated rules remove some of the documentation hurdles, and many plans now allow participants to self-certify the hardship, thereby bypassing the need for an employer to sign off on the paperwork. While no one wants to dip into their retirement funds early, if life throws you a curveball with a hefty price tag, you’ll have an easier time taking a penalty-free withdrawal.
Access to Financial Advisors
Not every 401(k) offers the same cookie-cutter investment options anymore. Some plans now include a self-directed brokerage account (SDBA), which opens the door to a broader range of investment options that you can manage on your own or with the assistance of a personal financial adviser.
For seasoned investors (or those who simply want more choice and guidance), this is a major step forward. You don’t have to go it alone, and you’re not limited to just a handful of mutual funds. However, be aware that a financial advisor’s guidance will come with a fee.
Automatic Enrollment for New Hires
One issue the SECURE Act 2.0 aims to address is boosting employees’ retirement savings. Starting this year, new 401(k) plans are required to enroll eligible employees automatically. That means if you’re starting a new job with a qualifying employer, you’ll likely be opted into the plan by default. Automatic enrollment typically begins at 3% of your salary and increases by 1% each year, up to a maximum of 10%. It will be up to the employee to opt out if they wish to do so.
This move could make a big difference for younger workers who might otherwise delay saving. Even a modest contribution early on can grow significantly over time, thanks to the power of compound interest.
Smarter Digital Tools
Gone are the days of randomly selecting investment funds. Most 401(k) providers now offer access to online dashboards and planning tools. Although the specific digital tools may vary across providers, they can help you calculate how much to save, project your retirement income, and compare investment choices. These tools are typically free, and they’ve quietly become one of the most useful (yet overlooked) features of a modern retirement plan. Much like a GPS, these digital tools can’t drive the car for you, but they’ll guide you on the most efficient route.
Annuities
In an effort to give savers a way to turn part of their retirement savings into guaranteed lifetime income, the SECURE Act includes a provision that allows 401(k) plans to offer annuities as investment options. Despite the potential benefits, annuities are still relatively uncommon in 401(k) plans. However, interest is on the rise, so watch for them to become a more common part of 401(k) retirement planning.
Take Action
401(k) plans have evolved from an add-on feature of retirement to flexible tools that can adapt to your changing financial goals. If it’s been a while since you reviewed your plan, take a few minutes to log in and see what’s available. That small step could end up making a big difference in your retirement.
by Daniel Kittell | Accounting News, News, Newsletter, Retirement, Retirement Savings
Essential changes to Individual Retirement Accounts (IRAs) and 401(k) plans are set to take effect in 2025, primarily due to the SECURE 2.0 Act. These modifications, set to phase in over the next several years, will impact your retirement savings strategy. Here’s what you need to know about these upcoming changes.
Catch-Up Contributions
One of the most significant changes involves catch-up contributions. The 401(k) contribution limit will increase from $23,000 in 2024 to $23,500 in 2025, while IRA contributions for workers age 50 and older remain at $7,500.
However, starting in 2025, workers aged 60 through 63 will have access to even greater catch-up contributions due to a provision in the Secure 2.0 Act. They’ll be able to make catch-up contributions of up to $11,250. This move helps workers in this age group bolster their financial security as they near retirement.
Automatic 401(k) Enrollment
Another key reform of the Secure 2.0 Act seeks to increase individual retirement savings. New 401(k) plans established on or after December 29, 2022, will be required to implement an automatic enrollment feature in 2025. Eligible employees will be automatically enrolled in their employer’s retirement plan at a minimum contribution rate of 3%, though they can opt out by selecting a 0% contribution rate. Employers can gradually increase the contribution amount by 1 percent, reaching up to 10% over time.
SIMPLE IRA Catch-Up Contributions
Changes are on the way for SIMPLE IRAs (Savings Incentive Match Plan for Employees). The annual limit for contributions to SIMPLE IRAs will increase to $16,500, up from $16,000 in 2024. For those aged 50 or older, the contribution limit remains at $3,500, but it increases to $5,250 for those aged 60-63, allowing for greater flexibility and potential for growth as these workers approach retirement.
The New 10-Year Rule for Inherited IRAs
Under the SECURE 2.0 Act, non-spouse beneficiaries must withdraw the entire balance of an inherited IRA within 10 years of the original account holder’s death. This is a shift from the previous “stretch IRA” rules, which allowed beneficiaries to take distributions over their lifetime. The change aims to ensure that inherited funds are utilized more quickly and will impact the tax strategies used in the future when benefactors are planning for their heirs.
However, the following types of beneficiaries of inherited IRAs can still utilize the “stretch IRA”:
- Surviving spouses
- A child of the decedent under the age of 21
- A beneficiary who is not more than 10 years younger than the decedent
- An individual who is disabled or chronically ill
If you are the benefactor of an inherited IRA and fall into one of the categories above, you must still withdraw funds from the inherited IRA over your lifetime beginning in the year following the decedent’s death.
Inherited IRA RMD Penalties
Lastly, there will be updated penalties related to Required Minimum Distributions (RMDs) for inherited IRAs. Previously, failing to follow the RMD rules resulted in a penalty of 50% on the amount not withdrawn. Starting in 2025, this penalty is significantly reduced to 25%. This adjustment offers some relief for beneficiaries who miss RMD deadlines, making the inherited IRA process less financially burdensome.
by Stephen Reed | Accounting News, News, Newsletter, Retirement, Retirement Savings, Tax Planning - Individual
Required Minimum Distributions (RMDs) are mandatory withdrawals from certain retirement accounts. They can significantly impact your tax burden and overall financial well-being. In 2024, changes introduced by the Secure 2.0 Act have increased the minimum age for RMDs, potentially leading to the highest RMDs in history. Here’s what retirees need to know about these new regulations and how they will affect your retirement strategy.
What Are Required Minimum Distributions (RMDs)?
RMDs are the minimum amounts that retirees must withdraw annually from tax-deferred retirement accounts such as 401(k)s, traditional IRAs, and 403(b)s once they reach a certain age. These distributions are designed to ensure that retirees eventually pay taxes on the funds they have been deferring throughout their working lives.
The Secure 2.0 Act Raised RMD Age
When the Secure 2.0 Act was passed in 2022, the age at which retirees must begin taking RMDs was raised from 72 to 73, granting more flexibility and time for retirement savings to grow. This change applies to retirees turning 73 in 2024 and beyond, offering an additional year of tax deferral before RMDs are required.
However, this delay could result in more significant distributions when retirees finally begin taking RMDs, especially if their accounts continue to grow. (Retirees who turn 73 in 2024 must take their first RMD by April 1, 2025.) Larger account balances combined with higher RMD percentages as retirees age could result in retirees facing the largest RMDs ever, especially with stock market gains in recent years.
Why 2024 RMDs Could Be the Highest Ever
The combination of tax-deferred growth, the higher RMD age, and inflation adjustments could make 2024 a challenging year for retirees facing their first RMDs. Because retirees must withdraw a specific percentage of their account balance, individuals with growing portfolios may end up withdrawing and facing taxes on larger amounts. This can push some retirees into higher tax brackets, which could lead to a reduction in overall retirement income.
Key Factors for Retirees to Consider
As you approach your RMD age, there are several important factors to keep in mind that can significantly impact your tax planning. Understanding these key points will help you make informed decisions and avoid common pitfalls related to RMDs.
- RMDs Are Taxed as Ordinary Income
When you take an RMD, it is taxed as ordinary income, meaning it is added to your other taxable income for the year. This can impact your tax liability, particularly if your RMD pushes you into a higher tax bracket. Careful tax planning is essential to minimize the impact of RMDs on your overall income.
- Failure to Meet RMD Deadlines Could Result in Financial Penalties
One of the most critical things retirees need to remember is that failure to take RMDs by the required deadline (typically December 31) can result in significant penalties. The current penalty for missing an RMD is 25% of the amount that should have been withdrawn. This penalty can often be reduced to 10% if the missed RMD is corrected within two years, but it’s still a costly mistake you’ll want to avoid.
- There’s No Escaping RMDs
Once you reach the RMD age, you must take these distributions from your tax-deferred accounts. Even if you don’t need the money, you are required by law to withdraw the minimum amount. Failure to do so will result in penalties, and delaying the withdrawal will not eliminate the tax liability.
For retirees who don’t need the extra income, reinvesting the distribution into a taxable account may be a good option to keep the money working for you, but the taxes will still need to be paid.
- RMDs Are Not Required in Roth IRAs
A strategy to possibly minimize the impact of RMDs is to utilize a Roth IRA. Unlike traditional IRAs or 401(k)s, Roth IRAs do not require RMDs during the account holder’s lifetime. Since contributions to Roth IRAs are made with after-tax dollars, the growth and withdrawals from these accounts are tax-free, providing more flexibility in retirement income planning. The one caveat to this applies to inherited Roth IRAs. If you’re the benefactor of someone else’s Roth IRA, you must take RMDs.
by Stephen Reed | Accounting News, News, Retirement, Retirement Savings, Tax
The passage of the Secure Act 2.0 in December of 2022 pushed back Required Minimum Distribution (RMDs) from age 72 to age 73 in 2023 (and age 75 in 2033). While proponents of this move argue that it provides advantages, such as allowing individuals more time to accumulate wealth in their retirement accounts, others warn that it could be a tax trap. Below we explore the potential pitfalls and drawbacks of this delay.
More Income Tax and Higher Medicare Premiums
While proponents argue that individuals will have more time to accumulate wealth in their retirement accounts without being required to withdraw a specific amount each year, it’s important to remember that RMDs are subject to income tax. By delaying the distributions, you risk ending up with significantly larger distributions in the future, resulting in higher tax liabilities when you eventually begin taking withdrawals. This could potentially push you into a higher tax bracket, increasing your overall tax burden and possibly negatively impacting what you pay for your Medicare premium as this is always based on your taxable income from two years prior.
Higher Tax on Social Security Benefits
If you have taxable income as well as Social Security benefits, such as your RMD, that can affect how much your Social Security benefit is taxed. If your adjusted gross income is more than $25,000 for single filers ($32,000 for joint filers), your Social Security payments can be taxable. If an eventual RMD will trigger that tax, an earlier withdrawal from your account may be the better move.
Consequences for Beneficiaries
Delaying RMDs could have unintended consequences for beneficiaries of inherited retirement accounts. Under current rules, non-spouse beneficiaries must withdraw the funds within ten years of the account owner’s death. This means that heirs who inherit the deceased owner’s account must distribute the entire account in 10 years. If those heirs are in their prime working years, they could likely pay a federal tax rate of 24% to 37%, plus another 3% to 12% in state income taxes. And the distributions could push their “other income” above the income thresholds ($200,000 for single filers and $250,000 for joint filers). By delaying RMDs, you could be dumping a hefty tax bill on your heirs.
