Important Retirement Savings Rules Changes You May Have Missed

Transcript of Podcast Episode 299

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, here are some important retirement savings rules changes you may have missed.

2019 seems so long ago. So much has changed since then: A pandemic, war in Ukraine, expanded conflict in the Middle East, the return of inflation and tension—once again—in the Royal family.

But it was back in December 2019, when the original Secure Act was signed into law. Its companion piece, Secure Act 2.0, came along three years later. Some of the provisions in both acts were phased in gradually. Here are some upcoming changes you might have missed.

Required Minimum Distributions (or RMDs). RMDs are a huge part of retirement planning. An RMD is the amount of money you must withdraw annually from a traditional IRA or 401(k). The first withdrawal must take place by April 1 of the year after you reach age 73. Starting in 2033, RMDs begin at age 75.[1]

The amount of the withdrawal is based on a government formula which requires you to take out a bigger percentage of the account each year as you age. When received, RMD distributions are considered taxable income.

It is difficult to miss an RMD when you have an independent custodian, but it does happen. The penalty for a missed RMD is severe, but the Secure Act softened the impact considerably. Prior to 2023, the penalty for a missed RMD was 50 percent. The Secure Act reduced this to 25 percent. But that’s not all. If you correct the mistake within two years, the penalty could be reduced further to 10 percent.[2] The IRS will also consider waiving the penalty entirely on a case-by-case basis if you have a good reason, such as a sudden illness.

There is also now a three-year statute of limitations if you miss an RMD. Prior to Secure 2.0, if you missed an RMD, the interest and penalties could go on indefinitely.

Roth 401(k). You don’t get a tax deduction when you contribute money to a Roth IRA or 401(k). But once inside the plan, the money grows tax-free, and with certain conditions, money can also come out of the plan on a tax-free basis. But a Roth 401(k) had one significant disadvantage when compared to a Roth IRA: RMDs. Up until this year, if you had a Roth 401(k), you had to make Required Minimum Distributions once you reached age 73. Not so for a Roth IRA. But Secure 2.0 changed that. RMDs are no longer required when you have a Roth 401(k).

There is also more flexibility available with a Roth 401(k) when it comes to an employer match. Matching contributions are a way employers can encourage their employees to participate in a 401(k). If some of your paycheck is withheld to go into a 401(k), the employer may match that contribution up to a certain percentage. Prior to last year, any matching contributions had to be made to a pre-tax account, even if you chose the Roth option for your own contribution. But since 2023, if the plan allows, the employee can choose to have the employer match classified as a Roth (after-tax) contribution. The one disadvantage to this is that the employer match, if placed into a Roth account, will be considered taxable income to the employee when it goes in.

Excess contributions to an IRA. Anyone can contribute up to $7,000 a year to a traditional IRA or $8,000 a year if you’re over age 50. This does not mean that the contribution will be tax-deductible. If you’re married filing jointly and make over $123,000 in 2024, some or all of your deduction will be lost.[3]

But what happens if you put in too much money? Excess contributions happen more frequently than many people realize. People may have more than one IRA set up, or they may have inadvertently contributed more than 100 percent of their taxable compensation. If this happens, there is a 6% excise tax for every year the excess contribution remains in an IRA. Under the new rules there is now a six-year statute of limitations for excess contributions to an IRA . The statute of limitations starts when the owner’s tax return is filed.[4]

SEP and Simple IRAs. These are special plans that are available to smaller employers and the self-employed. Under the new rules, Roth contributions are now allowed to these plans.

The Secure Act and Secure 2.0 were both designed to assist people when it comes to saving for retirement. But as with any new law, the rules can be confusing. Your Security Mutual Life insurance advisor can help. Your Security Mutual Life insurance advisor will assemble your team and coordinate with your attorney and tax professional to review your situation and to determine the estate plan that will best suite your needs and objectives.

[1] Mengle, Rocky. “New RMD Rules: Starting Age, Penalties, Roth 401(k)s, and More.”  Kiplinger.com https://www.kiplinger.com/retirement/new-rmd-rules (accessed September 3, 2024)

[2] Sloane, Leonard. “Changes in Retirement Savings Rules to Know Before Year’s End.” wsj.com. https://www.wsj.com/personal-finance/retirement/retirement-savings-rules-changes-year-end-555b4465?st=spr2ziagzcndc87&reflink=article_email_share (accessed September 3, 2024)

[3] Fidelity Smart Money. “IRA contribution limits for 2024.” Fidelity.com https://www.fidelity.com/learning-center/smart-money/ira-contribution-limits (accessed September 3, 2024)

[4] Appleby, Denise, “How Secure 2.0 Helps Protect Investors From Penalties and Excise Taxes.” Morningstar.com. https://www.morningstar.com/financial-advisors/how-secure-20-helps-protect-investors-penalties-excise-taxes (accessed September 16, 2024)

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