New Retirement Rules and Tax Changes to Ring in the New Year
With the 2024 Holiday season in full swing, I find myself looking forward to the joyful weeks ahead. From spending time with my family (especially those we see only a few times each year) to good food, beautiful snowfalls, thankful for the birth of our Savior, and lots of laughs; this is truly a wondrous time of year.
But as a finance guy, naturally I find more to think about this time of year than all of the festivities. In fact, this is a busy and exciting time of year. We have one last chance to revisit our retirement systems to make sure we didn’t miss out on opportunities to take advantage of financial and tax strategies that can improve our financial situations. And this year is no exception.
This has been a year of watchful waiting in the financial and tax arena. Financial advisors and tax planners spent the year reading the tea leaves from the presidential candidates to get an idea of what might be coming in 2025, and we continue to wait for some clarity. However, even without new tax rules to respond to, there are still important planning actions we can take before the end of this year. We've recently seen a flurry of new retirement rules and changes to tax law affecting retirement account contributions and withdrawals. The sweeping new rules impact nearly every taxpayer, including those inheriting a retirement account. So this week, let’s dig into a few tips for 2024, and even some ideas to kick off 2025 on the right foot.
For starters, we’re near the end for high earners to make pre-tax catch-up contributions. Thanks to the Secure Act 2.0, starting in 2026, employees ages 50 or older can only make catch-up contributions to an after-tax Roth account. This will only impact individuals deemed 'high earning', defined as those making more than $145,000 (indexed) in the prior year for the same employer, but this still affects a significant number of folks.
And if you inherited an IRA from a parent after 2019, you might need to start taking distributions in 2025. After waiting years for clarification, the IRS finally confirmed that effective for the 2025 tax year, some non-spouse retirement account beneficiaries must take annual distributions, referred to as Required Minimum Distributions or RMDs. The change applies to 'non-eligible designated beneficiaries' who inherit an IRA, 401(k), or other type of retirement account from someone who died after they were required to start distributions.
As a quick refresher, if you are a non-eligible designated beneficiary and inherit a retirement account from someone who reached RMD age, you must take required minimum distributions and empty the account within 10 years.
Under existing regulations, surviving spouses have a few different choices to consider as beneficiary of a deceased spouse's retirement account. One of those options is to keep the account as an inherited IRA. This could be especially beneficial if you are older than your deceased spouse since tax law allows the survivor to use the deceased spouse's age to determine when RMDs must begin on the inherited IRA.
In addition, for survivors with RMDs that are required to begin in 2024, there are new options to calculate annual distributions. If you elect to be treated as the decedent, you can use the more favorable uniform lifetime table to calculate RMDs, which typically results in a smaller forced distribution compared to the single life table.
The complete rules are fairly complex and the right option for you will vary depending on your unique circumstances, but overall they offer more flexibility and options to help maximize the inherited asset’s value.
Another key change is the elimination of RMDs from a Roth 401(k). Prior to the passage of Secure Act 2.0, only Roth IRAs allowed the original account owner to avoid RMDs. If you saved in a Roth 401(k), and never rolled the funds over to a Roth IRA, you were still subject to mandatory withdrawals. Starting in 2024, any assets you hold in a Roth 401(k) are no longer subject to mandatory distributions during your lifetime. This can save you a pretty penny in taxes and allows your funds to continue growing tax free for longer.
Confused by all the changes? You're not alone. It's this ever-evolving regulatory landscape, it's more difficult than ever to keep up with shifting tax law and retirement rules. On the main stage is the expiring of many key provisions in the Tax Cuts and Jobs Act, set to lapse at the end of 2025 unless the new administration elects to extend it. The best way to stay on top of these changes is to ensure you have a solid retirement system in place – one that includes a downside risk mitigation program that ensures you have a safety net, whatever those “Washington Wizards” throw our way.
So as always - be vigilant and stay alert, because you deserve more!
Have a great week. I hope everyone is having a wonderful Holiday Season.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA.
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