Maximizing Your 401(k) in 2025 if You Are Dreaming of Retirement!
About 70% of U.S. private-sector workers have the option to contribute to a retirement plan such as a 401(k), 403(b), or 457(b) plan provided by an employer. Unfortunately, many of them don’t take full advantage of this tax-friendly opportunity to save for the future.1
The SECURE Act and SECURE 2.0 Act (federal legislation passed in 2019 and 2022, respectively) sought to improve Americans’ retirement security by expanding access to workplace retirement accounts and encouraging workers to save more. As a result, some older workers will be allowed to make bigger contributions to their retirement accounts in 2025.
That’s good news if you are one of the many Americans who have experienced bouts of unemployment, took time out of the workforce for caregiving, helped pay for pricey college educations for your children (or yourself), or faced other financial challenges that prevented you from saving consistently. You may have some catching up to do. And regardless of your age, the responsibility for saving enough and investing wisely for retirement is largely in your hands.
Starting out strong
The funds invested in tax-deferred retirement accounts accumulate on a tax-deferred basis, which means you don’t have to pay any required taxes until you withdraw the money. Instead, all returns are reinvested so they can continue compounding through the years. This is the main reason why young workers can really benefit from saving as much as they can, as soon as they can.
Many companies will match part of employee 401(k) contributions, so it’s a good idea to save at least enough to receive full company matches and any available profit sharing (e.g., 5% to 6% of salary). But to set yourself up for a comfortable retirement, you might elect to automatically increase your contribution rate by 1% each year (if that option is available) until you reach your desired rate, such as 10% to 15%.
Saving to the max
If you have extra income that you would like to save, keep in mind that the employee contribution limit for 401(k), 403(b), and government 457(b) plans is $23,500 in 2025, with an additional $7,500 catch-up contribution for those age 50 and older, for a total of $31,000.
New for 2025, workers age 60 to 63 can make a larger “super catch-up” contribution of $11,250 for a total of $34,750. Like all catch-up contributions, the age limit is based on age at the end of the year, so you are eligible to make the full $11,250 contribution if you turn 60 to 63 any time during 2025 (but not if you turn 64).
You might also want to find out if your employer’s plan allows special after-tax contributions. If so, consider yourself lucky because this feature is not common, especially at smaller companies.
In 2025, the combined total for salary deferrals (not including catch-up contributions), employer contributions, and employee after-tax contributions is $70,000 or 100% of compensation, whichever is less.
You generally must max out salary deferrals before you can make additional after-tax contributions. For example, if you are age 60, and you contribute the maximum $34,750 to your 401(k), and your employer contributes $15,000, you may be able to make a sizable after-tax contribution of $31,500 for a grand total of $81,250.
SIMPLE retirement plans (offered by smaller companies) operate under different rules and have lower limits: $16,500 in 2025 plus an additional $3,500 catch-up for employees age 50 and older or an additional $5,250 for employees age 60 to 63. (Certain SIMPLE plans may have higher limits.)
All these contribution and catch-up limits are indexed annually to inflation.
Choosing between traditional or Roth
Traditional (or pre-tax) contributions are deducted from your paycheck before taxes, resulting in a lower current tax bill, and withdrawals are taxed as ordinary income. Roth contributions are considered “after-tax,” so they won’t reduce the amount of current income subject to taxes, but qualified distributions down the road will be tax-free (under current law).
A Roth distribution is considered qualified if the account is held for five years and the account owner reaches age 59½, dies, or becomes disabled. (Other exceptions may apply.)
Withdrawals from pre-tax retirement accounts prior to age 59½ and nonqualified withdrawals from Roth accounts are subject to a 10% penalty on top of ordinary income taxes. However, because Roth contributions are made with after-tax dollars, they can be withdrawn at any time without tax consequences.
When deciding between traditional and Roth contributions, think about whether you are likely to benefit more from a tax break today than you would from a tax break in retirement. Specifically, if you expect to be in a higher tax bracket in retirement, Roth contributions may be more beneficial eventually.
But you should also consider that generally you will have to take taxable required minimum distributions (RMDs) from traditional accounts once you reach age 73 (or 75, depending on year of birth), whether you need the money or not. Roth accounts are not subject to RMDs during your lifetime, which can make them useful for estate planning purposes. This also provides flexibility to make withdrawals only when necessary and could help you avoid unwanted taxes or Medicare surcharges.
Splitting your contributions between traditional and Roth accounts could help create a wider range of future options.
Lastly, there’s another new rule that could impact your contribution decisions over the coming years. Starting in 2026, all your catch-up contributions would have to be Roth contributions if you earned more than $145,000 during the previous year.
1) U.S. Bureau of Labor Statistics, 2024
Relief for Certain RMDs from Inherited Retirement Accounts for 2024
IRS issued in 2022, a proposed regulations regarding required minimum distributions (RMDs) to reflect changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The IRS has held off on releasing final regulations so that it can address additional changes to RMDs made by the SECURE 2.0 Act of 2022. In the meantime, the IRS has issued interim relief and guidance for certain RMDs from inherited retirement accounts for 2024. The IRS anticipates that final RMD regulations, when issued, will apply starting in 2025.
RMD basics
Certain RMDs must be taken from individual retirement accounts (IRAs) and employer retirement accounts, or a penalty will apply. IRA owners and employees with employer retirement plans must generally take RMDs during their lifetime.
RMDs are generally required to begin by April 1 of the year after the individual reaches RMD age. RMD age is 70½ (if born before July 1, 1949), 72 (if born July 1, 1949, through 1950), 73 (if born in 1951 to 1959), or 75 (if born in 1960 or later). An employee still working for the employer maintaining an employer retirement account may be able to wait until April 1 of the year after the employee retires (if that is later and the plan allows it). The applicable April 1 date is often referred to as the required beginning date (RBD).
Lifetime distributions are not required from Roth accounts and, as a result, Roth account owners are always treated as dying before their RBD. Prior to 2024, these two special rules for Roth accounts applied to Roth IRAs, but not to Roth employer retirement plans.
Beneficiaries must also take RMDs from an inherited retirement account (including Roth accounts) after the death of an IRA owner or employee.
Inherited IRAs and retirement plans
RMDs for IRAs and retirement plans inherited before 2020 could generally be spread over the life expectancy of a designated beneficiary. The SECURE Act changed the RMD rules by requiring that in most cases the entire account must be distributed 10 years after the death of the IRA owner or employee if there is a designated beneficiary (and if death occurred after 2019). However, an exception allows an eligible designated beneficiary to take distributions over their life expectancy and the 10-year rule would not apply until after the death of the eligible designated beneficiary in that case.
Eligible designated beneficiaries include a spouse or minor child of the IRA owner or employee, a disabled or chronically ill individual, and an individual no more than 10 years younger than the IRA owner or employee. The entire account would also need to be distributed 10 years after a minor child reaches the age of majority (i.e., distributed at age 31).
The proposed regulations issued in early 2022 surprised many when they suggested that annual distributions are also required during the first nine years of such 10-year periods in most cases. Comments on the proposed regulations sent to the IRS asked for some relief because RMDs had already been missed and a 25% penalty tax (50% prior to 2023) is assessed when an individual fails to take an RMD.
The IRS announced that it will not assert the penalty tax in certain circumstances where individuals affected by the RMD changes failed to take annual distributions in 2024 during one of the 10-year periods. (Similar relief was previously provided for 2021, 2022, and 2023.) For example, relief may be available if the IRA owner or employee died in 2020, 2021, 2022, or 2023 and on or after their RBD (see “RMD basics” above) and the designated beneficiary who is not an eligible designated beneficiary did not take annual distributions for 2021, 2022, 2023, or 2024 as required (during the 10-year period following the IRA owner’s or employee’s death). Relief might also be available if an eligible designated beneficiary died in 2020, 2021, 2022, or 2023 and annual distributions were not taken in 2021, 2022, 2023, or 2024 as required (during the 10-year period following the eligible designated beneficiary’s death).
The rules relating to RMDs are complicated, and the consequences of making a mistake can be severe. Talk to a tax professional to understand how the rules apply to your individual situation.
RMD Relief and Guidance for 2023
Earlier IRS proposed regulations regarding required minimum distributions (RMDs) reflected changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. IRS delayed releasing final regulations to include changes to RMDs made by the SECURE 2.0 Act of 2022, which was passed in late 2022. IRS issued interim RMD relief and guidance for 2023. Final RMD regulations, when issued, will not apply before 2024.
Relief with respect to change in RMD age to 73
The RMD age is the age at which IRA owners and employees must generally start taking distributions from their IRAs and workplace retirement plans. There is an exception that may apply if an employee is still working for the employer sponsoring the plan. (For Roth IRAs, RMDs are not required during the lifetime of the IRA owner.)
The SECURE 2.0 Act of 2022 increased the general RMD age from 72 to 73 (for individuals reaching age 72 after 2022). Since then, some individuals reaching age 72 in 2023 have taken distributions for 2023 even though they do not need to take a distribution until they reach age 73 under the changes made by the legislation.
Distributions, other than RMDs which cannot be rolled over, from IRAs and other workplace retirement plans can generally be rolled over tax-free to another retirement account within 60 days of the distribution. The 60-day window for a rollover may already have passed for some individuals who took distributions that were not required in 2023.
To help those individuals, the IRS is extending the deadline for the 60-day rollover period for certain distributions until September 30, 2023. Specifically, the relief is available with respect to any distributions made between January 1, 2023, and July 31, 2023, to an IRA owner or employee (or the IRA owner’s surviving spouse) who was born in 1951 if the distributions would have been RMDs but for the change in the RMD age to 73.
Generally, only one rollover is permitted from a particular IRA within a 12-month period. The special rollover allowed under this relief is permitted even if the IRA owner or surviving spouse has rolled over a distribution in the last 12 months. However, making such a rollover will preclude the IRA owner or surviving spouse from rolling over a distribution in the next 12 months. However, an individual could still make direct trustee-to-trustee transfers since they do not count as rollovers under the one-rollover-per-year rule.
Inherited IRAs and retirement plans
Before the SECURE Act, RMDs for IRAs and retirement plans inherited before 2020 could generally be spread over the life expectancy of a designated beneficiary. The SECURE Act changed the RMD rules by requiring that in most cases the entire account must be distributed 10 years after the death of the IRA owner or employee if there is a designated beneficiary (and if death occurred after 2019). However, an exception allows an eligible designated beneficiary to take distributions over their life expectancy and the 10-year rule would not apply until after the death of the eligible designated beneficiary in that case.
Eligible designated beneficiaries include a spouse or minor child of the IRA owner or employee, a disabled or chronically ill individual, and an individual no more than 10 years younger than the IRA owner or employee. The entire account would also need to be distributed 10 years after a minor child reaches the age of majority (i.e., at age 31).
The proposed regulations issued in early 2022 surprised many when they suggested that annual distributions are also required during the first nine years of such 10-year periods in most cases. Comments on the proposed regulations sent to the IRS asked for some relief because RMDs had already been missed and a 25% penalty tax (50% prior to 2023) is assessed when an individual fails to take an RMD.
The IRS has announced that it will not assert the penalty tax in certain circumstances where individuals affected by the RMD changes failed to take annual distributions in 2023 during one of the 10-year periods. (Similar relief was previously provided for 2021 and 2022.) For example, relief may be available if the IRA owner or employee died in 2020, 2021, or 2022 and on or after their required beginning date (The required beginning date is usually April 1 of the year after the IRA owner or employee reaches RMD age. Roth IRA owners are always treated as dying before their required beginning date) and the designated beneficiary who is not an eligible designated beneficiary did not take annual distributions for 2021, 2022, or 2023 as required (during the 10-year period following the IRA owner’s or employee’s death). Relief might also be available if an eligible designated beneficiary died in 2020, 2021, or 2022 and annual distributions were not taken in 2021, 2022, or 2023 as required (during the 10-year period following the eligible designated beneficiary’s death).
SECURE 2.0 Helps Small Employers Help Their Employees
Approximately 78% of people who work for companies with fewer than 10 employees and about 65% of those who work for companies with 10 to 24 employees do not have access to a retirement plan at work.1 That’s unfortunate, because workers with a retirement plan are far more likely to save for retirement than those without a plan. In 2022, 62% of those without a retirement plan had accumulated less than $1,000 for retirement, compared with 71% of those with a plan who had saved at least $50,000. More than four in 10 workers with access to a work-based plan had amassed a quarter million dollars or more.2
In December 2022, Congress aimed to address this issue (among others) by passing legislation that will help small employers more efficiently and cost-effectively offer retirement plans to their workforces, while providing incentives to help improve participation rates among lower-income workers. The SECURE 2.0 Act of 2022 — so named because it builds upon the original Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in 2019 — is a sweeping set of provisions designed to improve the nation’s retirement-planning health. Here is a brief look at some of the tax perks, rule changes, and incentives included in the legislation.
Tax Perks for Employers in 2023
Perhaps most appealing to small business owners, the Act enhances the tax credits associated with adopting new retirement plans, beginning in 2023.
For employers with 50 employees or less, the pension plan start-up tax credit increases from 50% of qualified start-up costs to 100%. Employers with 51 to 100 employees will still be eligible for the 50% credit. In either case, the credit maximum is $5,000 per year (based on the number of employees) for the first three years the plan is in effect.
In addition, the Act offers a tax credit for employer contributions to employee accounts for the first five tax years of the plan’s existence. The amount of the credit is a maximum of $1,000 for each participant earning not more than $100,000 (adjusted for inflation) in income. Each year, a specific percentage applies. In years one and two, employers receive 100% of the credit; in year three, 75%; in year four, 50%; and in year five, 25%. The amount of credit is reduced for employers with 51 to 100 employees. No credit is allowed for employers with more than 100 workers.
Rule Changes and Relevant Years
In 2024, employers will be able to adopt a deferral-only starter 401(k) or safe-harbor 403(b) plan, which are designed to be lower cost and easier to administer than traditional plans. Both plan types have auto-enrollment features and accept employee contributions only. Employees are enrolled at minimum contribution rates of 3%, not to exceed 15%, and may opt out. The plans may accept up to $6,000 per participant annually ($7,000 for those 50 and older), indexed for inflation.
SIMPLE plans may benefit from two new contribution rules. First, employers may make nonelective contributions to employee accounts up to 10% of compensation or $5,000. Second, the annual contribution limits (standard and catch-up) for employers with no more than 25 employees will increase by 10%, rather than the limit that would otherwise apply. An employer with 26 to 100 employees would be permitted to allow higher contributions if the employer makes either a matching contribution on the first 4% of compensation or a 3% nonelective contribution to all participants, whether they contribute. These changes also take effect in 2024.
Beginning in 2025, 401(k) and 403(b) plans will generally be required to automatically enroll eligible employees and automatically increase their contribution rates every year, unless they opt out. Employees will be enrolled at a minimum contribution rate of 3% of income, and rates will increase each year by 1% until they reach at least 10% (but not more than 15%). Not all plans will be subject to this new provision. Exceptions include those in existence prior to December 29, 2022; those sponsored by organizations less than three years old or employing 10 or fewer workers; governmental and church plans; and SIMPLE 401(k) plans.
Incentives for Participation
SECURE 2.0 drafters were creative in finding ways to encourage workers, particularly those with lower incomes, to take advantage of their plans. For example, effective immediately, employers may choose to offer small-value financial incentives, such as gift cards, for joining a plan. Beginning in 2024, employers may provide a matching contribution on employee student loan payments, which should help encourage younger workers to plan for their future. Also in 2024, workers will be able to withdraw up to $1,000 a year to cover unforeseeable or immediate emergencies without having to pay a 10% early distribution penalty, which should help address the fear of locking up retirement-plan contributions for many years. Employees will have up to three years to repay the emergency distributions and will not be able to take a second emergency distribution during this three-year period unless the first has been reimbursed.
1) AARP, July 2022
2) Employee Benefit Research Institute, 2022
Roth Conversions are getting a lot of attention
Some consider the drop in the markets maybe a good time for some to consider converting traditional IRAs to Roth IRAs. The withdrawal of the assets from the traditional IRA would be taxed currently. The resulting tax would be lower as the value of the investment would be lower. The future growth of the assets would not be taxable in the Roth or to the beneficiaries of the Roth. There are many assumptions and conditions to achieve the desired benefits.
Tax rate assumptions
One assumption is that you will be in a lower tax bracket when you retire. A related assumption is that the tax laws will not change when the funds are distributed from the Roth. One approach would be to calculate your tax based on various assumptions. Depending on your current tax bracket and assumed future tax brackets to see how much to convert now.
Future values
There is a risk that the value of the investment will not grow or will drop in value.
Two five-year tests
To qualify for tax-free and penalty-free withdrawal of earnings, including earnings on converted amounts, a Roth account must meet a five-year holding period beginning January 1 of the year your first Roth account was opened, and the withdrawal must take place after age 59½ or meet an IRS exception. If you have had a Roth IRA for some time, this may not be an issue, but it could come into play if you open your first Roth IRA for the conversion.
Assets converted to a Roth IRA can be withdrawn free of ordinary income tax at any time, because you paid taxes at the time of the conversion. However, a 10% penalty may apply if you withdraw the assets before the end of a different five-year period, which begins January 1 of the year of each conversion, unless you are age 59½ or another exception applies.
Roth account are not subject to Required Minimum Distributions (RMD)
Roth IRAs are not required to minimum distributions. Distributions are tax-free to the original owner of the Roth IRA and spouse beneficiaries who treat a Roth IRA as their own. Other beneficiaries inheriting a Roth IRA are subject to the RMD rules. The longer your investments can pursue growth, the more advantageous it may be for you and your beneficiaries to have tax-free income.
There are many considerations and assumption in determining if a Roth Conversion is appropriate for anyone. The above is not intended as a complete discussion of the subject. A trusted advisor should be consulted to see if a conversion should be considered .
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
Required Distributions from Inherited Retirement Accounts Change after 2019
Changes were made to the Required Minimum Distributions (RMD) for inherited Retirement Accounts by The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The ability of beneficiaries to “stretch-out” the distribution of the account balance of an inherited defined contribution plan or an IRA were changed. After 2019 beneficiaries must distribute the full amount in the account within 10 years of the original owner’s death, with some exceptions. Where an exception applies, the entire account must generally be emptied within 10 years of the beneficiary’s death, or within 10 years after a minor child beneficiary reaches age 21.
IRS issued proposed regulations (generally applicable starting in 2022) that interpret the revised required minimum distribution (RMD) rules in February 2022. The new rules are complex and create uncertainty. Hopefully, the IRS will simplify and answer the questions. Account owners and their beneficiaries would benefit by familiarize themselves with these new interpretations and how they might be affected by them.
RMD BasicsOwners of traditional IRAs and participants of retirement plan like a 401(k) must start taking RMDs in the year they reach age 72 (age 70½ if you were born before July 1, 1949). An owner of the account may be able to wait until the year after retiring to start RMDs from that account at age 72 or older and still working for the employer that maintains the retirement plan. No RMDs are required from a Roth IRA during lifetime (beneficiaries are subject to inherited retirement account rules). Generally, a 50% penalty applies to the extent that RMDs are not timely distributed.
Changes were made to the Required Minimum Distributions (RMD) for inherited Retirement Accounts by The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The ability of beneficiaries to “stretch-out” the distribution of the account balance of an inherited defined contribution plan or an IRA were changed. After 2019 beneficiaries must distribute the full amount in the account within 10 years of the original owner’s death, with some exceptions. Where an exception applies, the entire account must generally be emptied within 10 years of the beneficiary’s death, or within 10 years after a minor child beneficiary reaches age 21.
IRS issued proposed regulations (generally applicable starting in 2022) that interpret the revised required minimum distribution (RMD) rules in February 2022. The new rules are complex and create uncertainty. Hopefully, the IRS will simplify and answer the questions. Account owners and their beneficiaries would benefit by familiarize themselves with these new interpretations and how they might be affected by them.
RMD Basics
Owners of traditional IRAs and participants of retirement plan like a 401(k) must start taking RMDs in the year they reach age 72 (age 70½ if you were born before July 1, 1949). An owner of the account may be able to wait until the year after retiring to start RMDs from that account at age 72 or older and still working for the employer that maintains the retirement plan. No RMDs are required from a Roth IRA during lifetime (beneficiaries are subject to inherited retirement account rules). Generally, a 50% penalty applies to the extent that RMDs are not timely distributed.
The required beginning date (RBD) for the first year must be taken by April 1 of the next year. After the first distribution, annual distributions must be taken by the end of each year. Note, if the first distribution is delayed until April 1 two distributions will be required for that year, one by April 1 and the other by December 31.
The RMD rules govern how quickly retirement plans and/or IRAs must be distributed by the beneficiaries of the accounts. The rules are largely based on two factors: (1) the individuals named as beneficiaries of the retirement plan, and (2) whether the owner dies before or on or after your RBD. Because no lifetime RMDs are required from a Roth IRA, Roth IRA owners are always treated as dying before their RBD.
Who Is Subject to the 10-Year Rule?
Eligible designated beneficiaries (EDBs) are permitted to stretch out distributions to a limited extent. EDB’s include your surviving spouse, your minor children, any individuals not more than 10 years younger than you, and certain disabled or chronically ill individuals. Generally, EDBs can take annual required distributions based on remaining life expectancy. However, once an EDB dies, or once a minor child EDB reaches age 21, any remaining funds must be distributed within 10 years.
Note that the SECURE Act requires that if a designated beneficiary is not an EDB, the entire account must be fully distributed within 10 years after your death.
What If the Designated Beneficiary Is Not an EDB?
If you die before your required beginning date, no distributions are required during the first nine years after your death, but the entire account must be distributed in the tenth year.
If you die on or after your required beginning date, annual distributions based on the designated beneficiary’s remaining life expectancy are required in the first nine years after the year of your death, then the remainder of the account must be distributed in the tenth year.
What If the Beneficiary Is a Nonspouse EDB?
Annual distributions will be required based on your remaining life expectancy. If death occurs before the required beginning date, required annual distributions will be based on the EDB’s remaining life expectancy. If the owner of the account dies on or after their required beginning date, annual distributions after the owner’s death will be based on the greater of (a) what would have been the owners remaining life expectancy or (b) the beneficiary’s remaining life expectancy. Also, if distributions are calculated each year based on what would have been the remaining life expectancy, the entire account must be distributed by the end of the calendar year in which the beneficiary’s remaining life expectancy would have been reduced to one or less (if the beneficiary’s remaining life expectancy had been used).
After the death of the beneficiary or if the beneficiary is a minor child turns age 21, annual distributions based on remaining life expectancy must continue during the first nine years after the year of such an event. The entire account must be fully distributed in the tenth year.
What If a Designated Beneficiary A Spouse?
There are many special rules if a spouse is a designated beneficiary. The 10-year rule generally has no effect until after the death of the surviving spouse, or possibly until after the death of the spouse’s designated beneficiary.
What Life Expectancy Is Used to Determine RMDs After Death?
Annual required distributions based on life expectancy are generally calculated each year by dividing the account balance as of December 31 of the previous year by the applicable denominator for the current year (but the RMD will never exceed the entire account balance on the date of the distribution).
When life expectancy is used, the applicable denominator is the life expectancy in the calendar year of death, reduced by one for each subsequent year. When the nonspouse beneficiary’s life expectancy is used, the applicable denominator is that beneficiary’s life expectancy in the year following the calendar year of your death, reduced by one for each subsequent year. (Note that if the applicable denominator is reduced to zero in any year using this “subtract one” method, the entire account would need to be distributed.) And at the end of the appropriate 10-year period, any remaining balance must be distributed.
The rules relating to required minimum distributions are complicated, and the consequences of making a mistake can be severe. Talk to a tax professional to understand how the rules, and the new proposed regulations, apply to your individual situation.
2021 RMDs
Required Minimum Distributions (RMD) for 2021 must be paid by December 31, 2021. The requirement for 2020 was waived. Check with the custodian(s) where your IRA(s) are held if you have not yet received your entire RMDs for 2021. Some custodians have indicated delays in completing time sensitive transactions by December 31, 2021.
Annual RMDs have been required to begin at age 70.5 before a recent change. This requirement still applies to anyone born by June 30, 1949. Anyone born on or after July 1, 1949, are now required to start at age 72.
An exception to the beginning date applies to employees of retirement plans sponsored by their employers unless they own 5% or more of their employer. The required beginning date is postponed until they retire.
The first RMD may be postponed till April 1 of the following year. Delaying the distribution will result in 2 distributions in the following year. Among the factors to consider is the tax impact of delaying the RMD to April 1 of the next year.
RMDs apply to defined contributions plans and Induvial Retirement Plans (IRA). The distribution rules appl to IRA, SEP IRA, SIMPLE IRA, and Qualified Plans, such as Simplified Employee Plans, 401(k) Plans, are examples of Qualified Plans.
A 50% penalty applies if the RMDs are not paid by December 31 of the year required.
The above rules do not apply beneficiaries of inherited accounts. The rules for inherited is beyond the scope of this discussion.
RMDs are the minimum distribution. Larger distributions are permitted. This may apply when the applicable tax rate will be different in each year. Another factor is if you have a large or unexpected expenditures.
Your account balance is usually calculated as of December 31 of the year preceding the calendar year for which the distribution is required to be made. That balance is generally divided by the life expectancy factor determined by the IRS. You use your attained age in the distribution year by factor in the applicable IRS Uniform Lifetime Tables. The table assumes that you have designated a beneficiary who is exactly 10 years younger than you are. Every IRA owner’s and plan participant’s calculation is based on the same assumption.
Different calculations are used if the spouse is more than 10 years younger than you. the calculation of your RMDs may be based on the longer joint and survivor life expectancy of you and your spouse.
A new table will be used starting in 20222. The tables will reduce the annual RMD. The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment, or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other source
Required Minimum Distributions (RMD) for 2021 must be paid by December 31, 2021. The requirement for 2020 was waived. Check with the custodian(s) where your IRA(s) are held if you have not yet received your entire RMDs for 2021. Some custodians have indicated delays in completing time sensitive transactions by December 31, 2021.
Annual RMDs have been required to begin at age 70.5 before a recent change. This requirement still applies to anyone born by June 30, 1949. Anyone born on or after July 1, 1949, are now required to start at age 72.
An exception to the beginning date applies to employees of retirement plans sponsored by their employers unless they own 5% or more of their employer. The required beginning date is postponed until they retire.
The first RMD may be postponed till April 1 of the following year. Delaying the distribution will result in 2 distributions in the following year. Among the factors to consider is the tax impact of delaying the RMD to April 1 of the next year.
RMDs apply to defined contributions plans and Induvial Retirement Plans (IRA). The distribution rules appl to IRA, SEP IRA, SIMPLE IRA, and Qualified Plans, such as Simplified Employee Plans, 401(k) Plans, are examples of Qualified Plans.
A 50% penalty applies if the RMDs are not paid by December 31 of the year required.
The above rules do not apply beneficiaries of inherited accounts. The rules for inherited is beyond the scope of this discussion.
RMDs are the minimum distribution. Larger distributions are permitted. This may apply when the applicable tax rate will be different in each year. Another factor is if you have a large or unexpected expenditures.
Your account balance is usually calculated as of December 31 of the year preceding the calendar year for which the distribution is required to be made. That balance is generally divided by the life expectancy factor determined by the IRS. You use your attained age in the distribution year by factor in the applicable IRS Uniform Lifetime Tables. The table assumes that you have designated a beneficiary who is exactly 10 years younger than you are. Every IRA owner’s and plan participant’s calculation is based on the same assumption.
Different calculations are used if the spouse is more than 10 years younger than you. the calculation of your RMDs may be based on the longer joint and survivor life expectancy of you and your spouse.
A new table will be used starting in 20222. The tables will reduce the annual RMD.
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment, or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other source
Required Minimum Distributions (RMD) for 2021
Following are some of the developments to be consider before December 31,2021.
What Are RMDs?
Required annual distributions are required if you have a traditional IRA and most employer-sponsored retirement plans. RMDs are not required from an employer plan if you are still working at the company sponsoring the plan and you do not own more than 5% of the company. You can always take more than the required amount if you choose.
The portion of an RMD representing earnings and tax-deductible contributions is taxed as ordinary income, unless the RMD is a qualified distribution from a Roth account. Failing to take the full amount of an RMD could result in a penalty tax of 50% of the difference.
Everyone who reached 70½ (required beginning date) before January 1, 2020, was required to start making annual RMDs. Generally, RMDs must be taken by December 31 each year. You can delay your first RMD until April 1 following the year in which you reach RMD age; however, you will then need to take two RMDs in one year — the first by April 1 and the second by December 31. (If you reached age 72 in the first half of 2021, different rules apply; see below.) You should weigh the decision to delay your first RMD carefully. Taking two distributions in one year might bump you into a higher income tax bracket for that year.
New RMD Age and a 2020 Waiver Add Complexity
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 raised the minimum RMD age to 72 from 70½ beginning in 2020. That means if you reached age 70½ before 2020, you are currently required to take minimum distributions.
However, there was a pandemic-related rule change in 2020 that might have affected some retirement savers who reached age 70½ in 2019. To help individuals manage financial challenges brought on by the pandemic, RMDs were waived in 2020, including any postponed from 2019. In other words, some taxpayers could have benefited from waiving both their 2019 and 2020 RMDs.
Anyone who took advantage of the 2020 waiver should note that RMDs have resumed in 2021 and need to be taken by December 31. The option to delay to April 1, 2022, applies only to first RMDs for those who have reached or will reach age 72 on or after July 1, 2021.
New Life Expectancy Tables
The IRS publishes tables in Publication 590-B that are used to help calculate RMDs. To determine the amount of a required distribution, you would divide your account balance as of December 31 of the previous year by the appropriate age-related factor in one of three available tables.
Recognizing that life expediencies have increased, the IRS has issued new tables designed to help investors stretch their retirement savings over a longer period. These new tables will take effect for RMDs beginning in 2022. Investors may be pleased to learn that calculations will typically result in lower annual RMD amounts and potentially lower income tax obligations as a result. The old tables still apply to 2021 distributions, even if they’re postponed until 2022.
The New Fixed Distribution
The New Fixed Distribution Rule
The beneficiaries of an IRA, other than a spouses and certain other specified persons, are required to take the balance of the account within 10 years. The distributions do not have to be consist in each year if the entire balance is paid out within 10-years
Timing
Allow for delays in in processing and delivery of the distributions before December 31, 2021.
For more information on RMDs, consider speaking with your financial and tax professionals.
IRS Clarifies COVID-19 Relief Measures for Retirement Savers
The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March 2020 ushered in several measures designed to help IRA and retirement plan account holders cope with financial fallout from the virus. The rules were welcome relief to many people, but left questions about the details unanswered. In late June, the IRS released Notices 2020-50 and 2020-51, which shed light on these outstanding issues.
Required minimum distributions (RMDs)
One CARES Act measure suspends 2020 RMDs from defined contribution plans and IRAs. Account holders who prefer to forgo RMDs from their accounts, or to withdraw a lower amount than required, may do so. The waiver also applies to account holders who turned 70½ in 2019 and would have had to take their first RMD by April 1, 2020, as well as beneficiaries of inherited retirement accounts.
One of the questions left unanswered by the legislation was: “What if an account holder took an RMD in 2020 before passage of the CARES Act and missed the 60-day window to roll the money back into a qualified account?”
In April, IRS Notice 2020-23 extended the 60-day rollover rule for those who took a distribution on or after February 1, 2020, allowing participants to roll their money back into an eligible retirement account by July 15, 2020. This seemingly left account owners who had taken RMDs in January without recourse. However, IRS Notice 2020-51 rectified the situation by stating that all 2020 RMDs — even those received as early as January 1 — may be rolled back into a qualified account by August 31, 2020. Moreover, such a rollover would not be subject to the one-rollover-per-year rule.
This ability to undo a 2020 RMD also applies to beneficiaries who would otherwise be ineligible to conduct a rollover. (However, in their case, the money must be rolled back into the original account.)
This provision does not apply to defined benefit plans.
Coronavirus withdrawals and loans
Another measure in the CARES Act allows qualified IRA and retirement plan account holders affected by the virus to withdraw up to $100,000 of their vested balance without having to pay the 10% early-withdrawal penalty (25% for certain SIMPLE IRAs). They may choose to spread the income from these “coronavirus-related distributions,” or CRDs, ratably over a period of three years to help manage the associated income tax liability. They may also recontribute any portion of the distribution that would otherwise be eligible for a tax-free rollover to an eligible retirement plan over a three-year period, and the amounts repaid would be treated as a trustee-to-trustee transfer, avoiding tax consequences.(1)
In addition, the CARES Act included a provision stating that between March 27 and September 22, 2020, qualified coronavirus-affected retirement plan participants may also be able to borrow up to 100% of their vested account balance or $100,000, whichever is less. In addition, any qualified participant with an outstanding loan who has payments due between March 27, 2020, and December 31, 2020, may be able to delay those payments by one year.
IRS Notice 2020-50
To be eligible for coronavirus-related provisions in the CARES Act, “qualified individuals” were originally defined as IRA owners and retirement plan participants who were diagnosed with the virus, those whose spouses or dependents were diagnosed with the illness, and account holders who experienced certain adverse financial consequences as a result of the pandemic. IRS Notice 2020-50 expanded that definition to also include an account holder, spouse, or household member who has experienced pandemic-related financial setbacks as a result of:
- A quarantine, furlough, layoff, or reduced work hours
- An inability to work due to lack of childcare
- Owning a business forced to close or reduce hours
- Reduced pay or self-employment income
- A rescinded job offer or delayed start date for a job
These expanded eligibility provisions enhance the opportunities for account holders to take a CRD.
The Notice clarifies that qualified individuals can take multiple distributions totaling no more than $100,000 regardless of actual need. In other words, the total amount withdrawn does not need to match the amount of the adverse financial consequence. (Retirement investors should consider the pros and cons carefully before withdrawing money.)
It also states that individuals will report a coronavirus-related distribution (or distributions) on their federal income tax returns and on Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments. Individuals can also use this form to report any recontributed amounts. As noted above, individuals can choose to either spread the income ratably over three years or report it all in year one; however, once a decision is indicated on the initial tax filing, it cannot be changed. Note that if multiple CRDs occur in 2020, they must all be treated consistently — either ratably over three years or reported all at once.
Taxpayers who recontribute amounts after paying taxes on reported CRD income will have to file amended returns and Form 8915-E to recoup the payments. Taxpayers who elect to report income over three years and then recontribute amounts that exceed the amount required to be reported in any given year may “carry forward” the excess contributions — i.e., they may report the additional amounts on the next year’s tax return.
The Notice also clarifies that amounts can be recontributed at any point during the three-year period beginning the day after the day of a CRD. Amounts recontributed will not apply to the one-rollover-per-year rule.
Regarding plan loans, participants who delay their payments as permitted by the CARES Act should understand that once the delay period ends, their loan payments will be recalculated to include interest that accrued over the time frame and reamortized over a period up to one year longer than the original term of the loan.
Retirement plans are not required to adopt the loan and withdrawal provisions, so check with your plan administrator to see which options might apply to you. However, qualified individuals whose plans do not specifically adopt the CARES Act provisions may choose to categorize certain other types of distributions — including distributions that in any other year would be considered RMDs — as CRDs on their tax returns, provided the total amount does not exceed $100,000.
For more information, review IRS Notices 2020-50 and 2020-51, and speak with a tax professional.
(1)Qualified beneficiaries may also treat a distribution as a CRD; however, nonspousal beneficiaries are not permitted to recontribute funds, as they would not otherwise be eligible for a rollover.
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Individuals have different situations and preferences. Before any action is taken based upon this information, it is essential that competent individual professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources.
Coping with Market Volatility: Be Willing to Take Advantage of Market Downturns
Anyone can look good during a bull market. Smart investors are prepared to weather the inevitable rough patches, and even the best aren’t successful all the time. When the market goes off the tracks, knowing why you originally made a specific investment can help you evaluate whether those reasons still hold, regardless of what the overall market is doing.
If you no longer want to hold an investment, you could take a tax loss, if that’s a possibility. Selling locks in any losses on an investment, but it also generates cash that can be used to purchase other investments that may be available at an appealing discount. Sound research might turn up buying opportunities on stocks that have dropped for reasons that have nothing to do with the company’s fundamentals. In a down market, most stocks are available at lower prices, but some are better bargains than others.
There also are other ways to reap some benefit from a down market. If the value of your IRA or 401(k) has dropped dramatically, you likely won’t be able to harvest a tax benefit from those losses, because taxes generally aren’t owed on those accounts until the money is withdrawn. However, if you’ve considered converting a tax-deferred plan to a Roth IRA, a lower account balance might make a conversion more attractive. Though the conversion would trigger income taxes in the year of the conversion, the tax would be calculated on the reduced value of your account. With some expert help, you can determine whether and when such a conversion might be advantageous.
A volatile market is never easy to endure, but learning from it can better prepare you and your portfolio to weather and take advantage of the market’s ups and downs.
For more information on these strategies, contact us. We’re here to help.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
Although there is no assurance that working with a financial professional will improve investment results, a professional can evaluate your objectives and available resources and help you consider appropriate long-term financial strategies.
To qualify for the tax-free and penalty-free withdrawal of earnings (and assets converted to a Roth), Roth IRA distributions must meet a five-year holding requirement, and the distribution must take place after age 59½ (with some exceptions). Under current tax law, if all conditions are met, the account will incur no further income tax liability for the rest of the owner’s lifetime or for the lifetime of the owner’s heirs, regardless of how much growth the account experiences.
