6 New Retirement Rules And Tax Changes Everyone Should Know

6 New Retirement Rules Everyone Should Know In 2024 And 2025

In the last few years, we’ve seen a flurry of new retirement rules and changes to tax law affecting retirement account contributions and withdrawals. The sweeping new rules impact nearly every taxpayer, including those inheriting a retirement account. Here are six key new retirement rules and tax law changes everyone should know in 2024 and 2025.

The End Nears For High Earners To Make Pre-Tax Catch-Up Contributions

Thanks to the Secure Act 2.0, starting in 2026, employees ages 50 or older can only make catch-up contributions to an after-tax Roth account. The new rule will only impact individuals deemed ‘high earning’, defined as those making more than $145,000 (indexed) in the prior year for the same employer.

This may be a planning opportunity for individuals older than 50 who change jobs mid-year as they could be eligible for pre-tax catch-up contributions for another year or two before triggering the compensation limit for the prior year. The changes will apply to 401(k), 401(a), 403(b), and 457(b) plans starting in 2026.

Since executives older than 50 are usually in their highest earning years, the inability to exclude $7,500-plus from their taxable income is certainly a hit.

Inherited An IRA From A Parent After 2019? You May Need To Start Distributions In 2025

After many years of waiting and suspicion, the IRS finally confirmed that effective for the 2025 tax year, some non-spouse retirement account beneficiaries must take annual distributions, called required minimum distributions, or RMDs. The change applies to ‘non-eligible designated beneficiaries’ who inherit an IRA, 401(k), or other type of retirement account from someone who died after they were required to start distributions.

So at a high level, if a retirement account is inherited from someone who reached RMD age, the beneficiary must take required minimum distributions and empty the account within 10 years. If the original account owner had not yet reached RMD age, or if they left a Roth IRA to heirs, they only need to follow the 10-year rule.

The rules are complex and nuanced. So, you’ll want to read up on the new inherited IRA rules for non-spouses and discuss your situation with your financial advisor.

New Inherited IRA Options For Spouses

Under existing regulations, surviving spouses have a few choices to consider as beneficiary of a deceased spouse’s retirement account. One of those options is to keep the account as an inherited IRA. This could be especially beneficial if the surviving spouse was older, as tax law allows the survivor to use the deceased spouse’s age to determine when RMDs must begin on their inherited IRA.

For survivors with RMDs required to begin in 2024, there are new options to calculate annual distributions. If electing to be treated as the decedent, the survivor can use the more favorable uniform lifetime table to calculate RMDs, which typically results in a smaller forced distribution compared to the single life table.

The complete rules are complex and alternatives will vary depending on the unique circumstances. But overall, they provide more flexibility for surviving spouses to choose what works best for their financial situation.

Tax-Free 529 To Roth IRA Rollovers

If you have extra money left in a 529 college savings plan, you might be in luck. This new retirement tax law went into effect in 2024. Taxpayers can now make penalty-free rollovers from 529 plans to a Roth IRA. Here are the rules:

• The lifetime rollover limit is $35,000.
• The annual rollover limit is pegged to the yearly IRA contribution limit. This includes contributions made to any IRA. Plus, the amount rolled over plus annual IRA contributions cannot exceed the income the 529 plan beneficiary earned in the year.
• The 529 plan beneficiary and the Roth IRA owner must be the same person.
• The 529 account must have been open for at least 15 years.
• Contributions and earnings made within the last five years are not eligible for a rollover.
• The amount rolled over is tax-free and penalty-free.

No Required Minimum Distributions In Roth 401(k)s

Prior to the passage of Secure Act 2.0, only Roth IRAs allowed the original account owner to skip lifetime RMDs. Employees who saved in a Roth 401(k), and never rolled the funds over to a Roth IRA were still subject to mandatory withdrawals. Starting in 2024, individuals with assets in a Roth 401(k) won’t be subject to mandatory distributions during their lifetime.

As with any financial decision, there are pros and cons to leaving money in an employer plan versus rolling it over. One new drawback is that these changes don’t extend to beneficiaries unless 100% of the 401(k) funds are in the Roth 401(k) account (in which case the 10-year rule likely applies instead). Spouses may have additional options, subject to plan rules.

Roth Contributions Eligible To Employers; SIMPLE And SEP IRAs

Although not new for 2024, since 2023, Roth options have expanded in the retirement landscape. Employers can choose to offer non-elective or employer matching contributions to Roth accounts. Employers offering matching based on student loan payment may also apply contributions to Roth accounts. All employer funds treated as Roth will be immediately 100% vested.

In addition, SIMPLE and SEP IRAs are no longer limited to pre-tax options. The Secure Act 2.0 also made it possible for employers to offer after-tax Roth SEP or SIMPLE IRA funding if the employee elects. SIMPLE IRAs can be funded by both the employer and employee, while SEP IRAs are only funded by the employer.

Important caveat: The employer’s Roth contribution is included in the employee’s gross income for the year.

More Tax Changes To Come?

Confused by all the changes? You’re not alone. It’s this ever-evolving regulatory landscape, it’s more difficult than ever to keep up with shifting tax law and retirement rules. On the main stage is the expiring of many key provisions in the Tax Cuts and Jobs Act, set to lapse at the end of 2025.