Understanding Personal Finances – Fall 2024
Since the 1970s, federal law has required that at a certain age, you generally must start withdrawing a certain amount of money – a “required minimum distribution” or “RMD” – from your retirement savings each year. RMDs are intended to ensure that tax-deferred savings will eventually be withdrawn and taxed. The SECURE Act and the SECURE 2.0 Act eased RMD rules as described below.
A later start. Currently, under the SECURE 2.0 Act, RMDs must begin at 73. (Earlier, the SECURE Act had raised the RMD age from 70½ to 72.)
No RMDs from Roth accounts. Roth IRAs (individual retirement accounts) are exempt from RMDs, and under the SECURE 2.0 Act, so are Roth accounts in workplace retirement plans for as long as the participant is alive. The RMD rules apply only to traditional IRAs and traditional accounts in workplace plans.
A reduced penalty. As of January 1, 2023, the penalty for failing to take an RMD was decreased to 25% (previously 50%) of the required amount not taken. The penalty is 10% for the owner of a traditional IRA who withdraws an RMD amount previously not taken and files a corrected tax return on a timely basis.1
It used to be that you couldn’t contribute to a traditional IRA after age 70½, but the SECURE Act repealed this restriction. Currently, you can contribute to a traditional IRA for as long as you like, provided you have what the IRS considers “earned income” (generally wages, salaries, bonuses, commissions, tips and net earnings from self-employment).
Workplace plans and Roth IRAs have never imposed age restrictions on your contributions.
Previously, when an IRA owner died and the account’s assets went to a beneficiary other than the owner’s spouse, the beneficiary could stretch out withdrawals from these assets over their lifetime. Under the SECURE Act, the non-spouse beneficiary must generally withdraw assets (and pay taxes on them) within 10 years.
There are exceptions to this rule. For example, if the beneficiary is the account owner’s minor child, the 10-year clock doesn’t start ticking until the child reaches age 21. Also, a chronically ill individual or a beneficiary who is not more than 10 years younger than the account owner is exempted from the 10-year time limit on withdrawals.
Catch-up contributions are amounts that people aged 50 or older can make to retirement accounts beyond the standard contribution limits. Under the SECURE 2.0 Act, the limit on catch-up contributions to IRAs is subject to an annual inflation adjustment. In 2024, the limit is $1,000.
Many parents are reluctant to fund a 529 college savings account because of the possibility that their child will end up not attending any college. If the parents were to withdraw 529 account money for non-college purposes, they’d have to pay taxes plus a 10% penalty on the withdrawal.
The SECURE 2.0 Act addressed this concern. Generally, parents can now move unused 529 account savings to a Roth IRA for the 529 account’s beneficiary without triggering taxes or a penalty on the transfer. The transfer cannot exceed the IRA contribution limit for that year, and there’s a $35,000 lifetime limit per account beneficiary on the amount transferred. The 529 plan must have been maintained for 15 years or longer. Other restrictions apply as well.1 Under the SECURE 2.0 Act, the “correction window” starts on the date that the penalty is imposed (generally January 1 of the year of the missed RMD). The window ends on the earliest of the following dates: when a Notice of Deficiency is mailed to the taxpayer, when the penalty is assessed by the IRS or the last day of the second tax year after the penalty is imposed.