Government Rules That Actually Help – A Guide to the New Retirement Provisions

Government Rules That Actually Help – A Guide to the New Retirement Provisions

Here’s a breath of fresh air: the government has actually rolled out some changes that might work in your favor, especially if you’re a business owner or someone nearing retirement. With new rules aimed at refining how retirement savings are managed, these updates could simplify your financial planning and offer some welcome flexibility.

Congress has introduced a series of provisions—many of which are still being phased in—that could significantly impact your retirement strategy, particularly when it comes to required minimum distributions (RMDs) and the types of accounts eligible for specific contributions. While it’s not every day that a new law feels like a win, these adjustments might just make you rethink your retirement approach.

Let’s break down the key changes that could benefit you:

1. Roth 401(k) Plans Exempt from RMDs
   Previously, even though Roth 401(k) contributions were made with after-tax dollars, you still had to take RMDs. Now, that’s a thing of the past. This change aligns Roth 401(k)s with Roth IRAs, allowing your savings to continue growing without the interruption of mandatory withdrawals.
2. Mandatory Roth Contributions for High Earners' Catch-Up Contributions
   Starting in 2026, if you’re over 50 and earning more than $145,000 a year, any catch-up contributions to your 401(k) must be made on a Roth basis. This tweak adds a strategic layer to your retirement planning, especially for those aiming to maximize tax-free growth.
3. Extended Tax Deferral for Spousal Beneficiaries
   Good news if you’re an older spouse inheriting an IRA from a younger partner: you can now delay RMDs until your late spouse would have turned 73. Additionally, using the IRS’s uniform lifetime table could result in smaller RMDs, allowing more of your assets to benefit from tax-deferred growth.
4. Reduced Penalties for Missed RMDs
   Missing an RMD used to be costly, but starting in 2023, the penalty has been reduced from 50% to 25%, and it can drop even further to 10% if you correct the mistake within two years. Plus, you can still request a penalty waiver by demonstrating reasonable cause, like dealing with an illness or the loss of a spouse who handled your finances.
5. New Time Limits on IRS Penalties
   • For Missed RMDs: The IRS no longer has indefinite power to penalize missed RMDs. Now, there’s a three-year statute of limitations beginning when you file your tax return.
   • For Excess Contributions: A six-year statute of limitations has been introduced for excess IRA contributions, offering some protection if you inadvertently exceed the limit.
6. Roth Contributions Allowed in SEP and SIMPLE IRAs
   For small business owners and the self-employed, there’s now an option to make Roth contributions to SEP and SIMPLE IRAs, giving you more control over your tax planning.
7. Employer Matches Can Now Be Roth Contributions
   Employers can now offer matching contributions on a Roth basis. While you’ll pay taxes on the contributions upfront, you’ll enjoy the long-term benefits of tax-free growth in your retirement account.

These changes represent a rare instance where government intervention might actually simplify and improve your retirement planning. Whether you're a business owner or someone fine-tuning your retirement strategy, staying informed about these updates could help you make the most of your financial future.

Sources:

https://www.wolterskluwer.com/en/expert-insights/sep-and-simple-iras-and-the-secure-20-act#:~:text=A%20provision%20included%20in%20the,also%20clarified%20by%20Notice%202024.

https://thelink.ascensus.com/articles/2024/2/14/irs-offers-details-on-secure-act-20-roth-sep-and-simple-provisions

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