For years it seemed as though retirement planning wasn’t going to see major changes. Aside from annual adjustments to IRA and 401(k) contribution limits, the rules surrounding retirement plans pretty much stayed the same. But all of that has been upended in recent years.
Congress has taken a renewed interest in retirement plans over the past few years, and many of the changes that Congress has made have been beneficial to American workers. With the passage of Congress’ latest spending bill, there have been even more changes made to retirement plans. Here are five of the most important recent changes to your retirement plans that you need to know about.
1. Raising RMD Age to 73
For most people in retirement or nearing retirement, one of the biggest and most important changes is the raising of the required minimum distribution (RMD) age to 73. Not too long ago the RMD age was 70. Then Congress changed it to 72. Now it’s 73. And in 2033 it will rise to 75.
That means that anyone today who is under age 73 now has one extra year before RMDs kick in. And anyone who is 63 or under won’t have to take RMDs until they turn 75.
There has been some criticism of this move from those who think that only the wealthy will benefit from the higher RMD age, as supposedly only wealthy retirees will be able to hold off on dipping into their retirement savings until they reach 75. But there are a few advantages even for those who aren’t wealthy.
For one thing, a higher RMD age gives you more time to build up your retirement savings. All the extra time you can get can help you maximize your retirement savings.
And for those who are already having to dip into their retirement savings before they hit RMD age, the increased RMD age means that they can draw down their retirement savings a bit more before they hit age 75, thus potentially reducing the size of their future RMDs. That in turn could help you save on the taxes you pay when you take your RMDs.
2. No RMDs From Roth 401(k)
Roth 401(k) accounts probably aren’t as widely available as their pre-tax counterparts, but they can be another useful tool in your retirement arsenal. Until now, however, Roth 401(k) accounts were subject to RMDs, unlike Roth IRAs.
This disparity of treatment removed one of the advantages of a Roth IRA account, which was the immunity from RMD requirements. Starting in 2024, employer Roth 401(k) accounts will no longer be subject to RMD requirements, moving them in line with Roth IRA accounts. Even better, employers will be able to start offering matching contributions to Roth 401(k) accounts, making them even more attractive options for retirement savings.
Previously, many Roth 401(k) account holders rolled over those funds into a Roth IRA if they wanted to avoid RMDs. But this could have put them at risk of moving their funds into accounts with fewer choices, higher fees, etc. Now with no RMDs on Roth 401(k) accounts, they won’t have to do any more Roth 401(k) to IRA rollovers.
3. Reducing RMD Tax Penalties
Penalties for failing to take RMDs when you’re supposed to have been heavy, at 50% of the amount you’re required to take annually. That penalty has now been reduced to 25% and, if you correct your mistake within a certain period of time, you may get that reduced to 10%. This makes it far less costly to fail to take RMDs on time.
4. Mandatory 401(k) Plan Enrollment
Starting in 2025, new workplace 401(k) plans will have to automatically enroll all eligible employees. Mandatory contributions will be deducted from paychecks and will increase one percentage point each year, up to a maximum of 15%.
While employees will have the opportunity to opt out, it’s unclear how many will. As this mandatory 401(k) participation takes effect, it could result over time in trillions more dollars making their way into financial markets.
How exactly these 401(k) plans would work, what funds they might automatically invest in, etc., is still unknown. But with so much money potentially making its way into financial markets, that could provide an automatic subsidy to stock and bond markets, which could be the top destinations for all of that new money, and it could boost stock and bond prices.
5. Changes to Catch-Up Contributions
Starting in 2024, the IRA catch-up contribution that currently stands at $1,000 per year will be indexed to inflation. That means that once you reach age 50 you’ll be able to contribute more towards your retirement savings in an IRA account.
And starting in 2025 workers 60 to 63 years old will be able to contribute additional 401(k) catch-up contributions, which will be the greater of either $10,000 or 150% of the standard catch-up contribution in 2024. That $10,000 sum will be indexed to inflation starting in 2026.
These changes are intended to make it easier for older workers to build up their retirement savings. Believe it or not, many people realize far too late that they haven’t saved enough for retirement. But there doesn’t have to be a “too late” if you take the right steps to save and invest before you retire.
Learn About Your Retirement Options
These new retirement options are going to affect a whole host of retirement accounts, including IRA, 401(k), TSP, and other accounts. Whether you have a workplace 401(k) account, a Roth IRA, or even a gold IRA, these new rules will impact not only how you invest and access your money, but also your retirement time horizon and investment planning.
This article just scratches the surface and gives you the overview of some of the biggest impacts that will likely affect your retirement savings. But it’s up to you to continue educating yourself and staying on top of new developments in the retirement planning arena. After all, it’s your retirement savings and your responsibility to make sure that your money lasts you through retirement.