A new rule under the Secure 2.0 law will require high earners over 50 making catch-up contributions to their 401(k)s to pay income tax on those contributions starting next year, effectively converting them to Roth contributions. This change primarily affects those earning over $145,000, potentially increasing current tax bills but offering tax-free growth and withdrawals for the Roth portion. The rule aims to target high earners and may influence retirement savings strategies.
Key changes to 401(k) plans under the Secure 2.0 Act will take effect in 2025, aiming to enhance retirement savings for American workers. These include increased catch-up contribution limits for those aged 60-63, reduced eligibility wait times for part-time workers, and mandatory auto-enrollment for new plans. These updates are designed to address the challenges faced by many Americans in saving for retirement, as highlighted by a CNBC survey showing that 40% of workers feel behind in their retirement planning.
The IRS announced that in 2025, the maximum 401(k) contribution limit will increase to $23,500, with a new "super" catch-up contribution for those aged 60 to 63, allowing them to contribute up to $34,750 annually. This change is part of the SECURE 2.0 Act, aimed at enhancing retirement savings. However, experts note that few people currently max out their contributions, and the impact may be limited. Regular contributions and gradual increases are recommended for effective retirement planning.
Billions of dollars are lost annually from the U.S. retirement system due to 401(k) plan "leakage" when workers cash out their accounts, with about 40% of job switchers doing so each year. Recent policy changes, including Secure 2.0 legislation and a new "auto portability" initiative, aim to reduce this leakage by making it easier for small balances to automatically follow workers to their new jobs, preventing cash-outs or rollovers to IRAs. Additionally, a "lost and found" for old retirement accounts is in the works to help workers locate and access forgotten benefits.
Retirement planning in 2024 sees significant changes with increased contribution limits for IRAs and 401(k)s, the ability to convert 529 plans to Roth IRAs, penalty-free emergency withdrawals, and the introduction of Starter 401k plans for small businesses. The new IRA and 401(k) contribution limits are $7,000 and $23,000, respectively. Unused 529 plan funds can now be rolled over into a Roth IRA for the beneficiary without penalty, given certain conditions. Individuals can make a $1,000 emergency withdrawal from their retirement accounts without a penalty, and victims of domestic abuse can withdraw up to $10,000. Starter 401k plans aim to make it easier for small businesses to offer retirement benefits. These changes necessitate updated retirement strategies and possibly consulting a financial advisor.
More employers are offering Roth 401(k) options in their retirement plans, with 89.1% of employers allowing workers to contribute to a Roth account in 2022, up from 58.2% in 2013. However, only 21% of workers are taking advantage of this option, with 72% still saving in a traditional pre-tax account. The recently passed retirement law, Secure 2.0, is expected to increase Roth uptake by requiring catch-up contributions to be made to Roth accounts for high-income workers. Employers are also starting to offer their company match in a Roth account. Financial advisors recommend considering Roth contributions for investors in a lower tax bracket now than in retirement, and for young workers with their highest-earning years ahead. Roth savings also have additional benefits, such as avoiding required minimum distributions and reducing Medicare Part B premiums.
Retirees who turned 72 in 2022 have until April 1 to make their first mandatory retirement plan withdrawal, known as required minimum distributions (RMDs), or face a 25% tax penalty. RMDs apply to pre-tax and Roth 401(k)s, most individual retirement accounts, and other workplace plans. Although Secure 2.0 raised the beginning age for RMDs to 73 starting in 2023, retirees who turned 72 in 2022 still must withdraw the funds by April 1 to avoid the penalty. The penalty for missed RMDs was reduced to 25% from 50% starting in 2023, with the possibility of reducing it further to 10% if you take your missed RMD during the "correction window."
