February 02, 2023
Congress recently passed a bunch of new rules that will impact how much you can save for retirement, make it easier to save in Roth accounts, and change when retirees must start taking withdrawals from traditional retirement accounts.
Some of the changes are already in effect, others will start in the coming years. Here are the big takeaways for how Congress is trying to help you do an even better job of saving for retirement, and spending down your accounts in retirement.
RMDs: 73 and 75 are the new 72.
If you have money saved in a traditional 401(k) or traditional IRA, the federal government insists that you must withdraw a certain amount annually, beginning at a certain age. The government does this because when you contributed money to a traditional retirement account it gave you a tax break—your contribution was made with pre-tax income—and the deal is that in retirement you must take money out so the government can tax the withdrawal.
This is known as a required minimum distribution (RMD). Beginning in 2023, you must start taking annual RMDs once you turn 73. Beginning in 2033, RMDs must start the year you turn 75.
Put another way:
RMDs must start at age 73 for anyone born between 1951 and 1959.
RMDs must start at age 75 for anyone born in 1960 or later.
I want to be clear: this is only the latest age you must begin to take RMDs. You can make withdrawals from your retirement accounts earlier if you need to or want to.
Roths are now easier for everyone.
Workplace Roth 401(k)s just got even better. Employers can now make their matching contribution into a Roth account, and beginning in 2024 you will no longer need to take RMDs from Roth 401(k)s.
And self-employed workers will now be able to save in a SEP-IRA that is a Roth account. That’s a big plus, as SEP-IRAs have higher contribution limits than regular Roth IRAs, and there is no income limit to who can contribute. If you work for a small employer who runs a SIMPLE IRA retirement plan, those too can now offer a Roth option.
Be sure to read next week’s email newsletter, as I will explain these great new Roth features in detail.
Save even more when you’re closer to retirement.
The government allows people at least 50 years old to save more in their 401(k) and IRAs. In 2023, the 401(k) catch-up amount is $7,500 and the IRA catch-up amount is $1,000.
The new law increases the amount of these catch-up contributions.
Beginning in 2025, anyone age 60 through 63 will be able to make a catch-up contribution of at least $10,000 to a 401(k). That $10,000 will be indexed to inflation.
For IRAs, beginning in 2024, the $1,000 catch-up will be indexed to inflation, which means it could increase annually.
No penalty for an emergency 401(k) withdrawal.
Starting in 2024, an emergency withdrawal of up to $1,000 a year will not be charged a 10% early withdrawal penalty. I want to be clear: I still think you should do everything possible to never touch your retirement savings. It is crucial to work on building up an emergency savings account (and my favorite place to do this is in the Ultimate Opportunity Savings Account at Alliant Credit Union).
This new legislation was passed in the last week of 2022. We all might need to be a little patient as plan sponsors and brokerages scramble to update their systems to reflect the changes that go into effect this year.