In late 2022, Congress approved a $1.7 trillion spending bill which included some adjustments that will impact those saving for retirement. Here’s what you need to know.
Required Minimum Distribution (RMD) Age Increases to 73
RMDs are withdrawals that the IRS requires seniors to take from retirement accounts annually once they reach a certain age. Previously 72, the starting age now rises to 73 in 2023 and will ultimately increase to 75 by 2033. While many people need to withdraw retirement funds to cover living expenses, those that can wait until they turn 73 will see additional growth in their accounts since this change gives the money more time to grow. If you turned 72 in 2022, you must continue taking RMDs, but if you turn 72 in 2023, you can wait one more year before taking them.
Penalties Reduced for Not Taking RMDs
If you’ve ever forgotten to take your RMD, you know firsthand that the penalties are no joke at half of the amount not taken. Starting in 2023, the penalty for not taking your RMD is reduced from 50% to 25% of the amount you should have taken. Even better, the fine can drop from 25% to 10% for individual retirement account (IRA) owners who forget to take their RMD as long as they fix their mistake and withdraw the funds in a “timely manner.” The way to do this is to send a letter explaining why you did not take your RMD and what you have done to correct it along with IRS Form 5329 instead of payment. The IRS often waives the penalty if there is a “reasonable error.” While there are no official definitions for “timely manner” and “reasonable error,” if can’t hurt to give it a shot.
Change to RMDs for Roth Accounts in 2024
While owners of Roth IRAs do not have to take RMDs while they are living, those that own Roth 401(k)s and Roth 403b)s do. Starting in 2024, owners of workplace Roth plans will no longer have to take RMDs, meaning the owner can leave the account along and will it to beneficiaries if they want. Remember, there are post-death RMD rules
that apply to Roth accounts, and those remain in place.
Catch-Up Contributions Increased in 2025
As of January 1, 2025, those that are aged 60-63 will be allowed to make up to $10,000 in annual catch-up contributions to a workplace retirement plans. However, if you earned more than $145,000 in the year before you want to make the catch-up contribution, it will have to be made into a Roth account using after-tax dollars. If you made less than $145,000, you can make the contribution into any retirement account you want. For those 50 years of age and older, your current catch-up contribution amount ($1000 currently) will start being indexed to inflation, so you can expect it to slowly increase over time.
Our next post will talk about retirement saving impacts for those that are not nearing retirement. If you have any questions or need help determining your best course of action, reach out to schedule an appointment.