There are a bunch – almost too many to count – of important details that a valued financial adviser can obsess over, so clients do not have to. One of those details is the 2022 SECURE Act 2.0 which continues to unfold, in two short months starting on January 1, 2025.
A number of the changes affect rules around two items:
- 401k saving
- RMDs (required minimum distributions) from Inherited IRAs.
Changes to both will also have present and future tax consequences.
401k, 403b, & TSP Saving:
For those age 50 and over (woo hoo), there is such a thing as an additional “catch-up” contribution that can be made to a 401k.
- The “catch-up” amount in 2024 is an extra $7,500 on top of the regular $23,000 maximum, for a total of $30,500.
- Starting in 2025 the “catch-up” will go UP for those age 60-63 to an amount of the greater of $10,000 or 150% of the catch-up limit, or $11,250 (which is 1.5 * $7,500). Thereafter, the catch-up amount will be indexed to inflation.
- The new rules also say that the 401k catch-up – which has traditionally been able to be made at the employee’s choice either pre-tax OR to the Roth 401k (which is after-tax) – will be required to be made after-tax starting in 2026. There are future advantages to making 401k contributions after-tax today – and effects on both current and future taxes.**
Is your head spinning yet? (Remember what was said earlier about a true, valued financial adviser obsessing over these details so you don’t need to.)
The obsessing part, of course, partly involves taxes – which is the responsibility of a tax professional. But a qualified Certified Financial Planner™ can suggest questions and scenarios that can be run by a tax professional. Questions such as:
- Does it make sense NOT to continue to increase the amount of 401k catch-up and simply save additional dollars “outright” in a regular, non-IRA/non-401k savings or investment account?
- What are the tax consequences – both present and future – of continuing to save in qualified, pre-tax and Roth (after-tax) accounts?
- What are the estimated, future taxable RMDs from a person’s total of pre-tax IRA, IRA Rollover and 401k (and 403b & TSP) accounts?
Inherited IRA Changes to RMD Rules:
Since 2020 (from the first SECURE Act) the IRS has pushed making a decision about RMD rules for Inherited IRAs. Now, starting in 2025, there will be a yearly RMD required, but as stipulated in the 2020 SECURE Act the entire Inherited IRA still must be withdrawn by the end of the 10th year after the original owner passed away. There will not be penalties for not taking RMDs in years 2020-2024.
A couple of worthwhile closing remarks,
For those younger than or close to age 50, there is an obvious point to these changes: not enough people of ALL ages know how to save and too many will be in trouble someday for not saving enough. An available statistic states that “only 15% of eligible workers made catch-up contributions in 2023… but that 40% are behind in saving for retirement.”* For younger people: seek knowledge about saving – or simply start saving (paying yourself in a savings or investment account) today.
Finally, one more detail to obsess about (or ask your financial adviser) – remember the 2022 SECURE Act 2.0 also raised the start date for RMDs to age 73 instead of age 70½. Although for savers in their mid-60’s who have large, say, over $500k or $750k balances already in their IRAs or IRA Rollovers, it can make sense to start taking withdrawals earlier than age 73.**
‘Tis the season to be designing – or starting – savings strategies for 2025.
*Source: Emma W. Thorne, Editor at LinkedIn News. **Consult with a tax professional on all tax related matters.
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied upon for, tax, legal or accounting advice.