A lot of new changes have been taking place lately in regard to finances – the rise and fall of crypto empires, remote work testing the landscape of state income tax, and the uncertain future of many pandemic-era provisions. Not all of it is stressful and confusing though. New laws have brought some especially noteworthy and positive changes to retirement accounts.
New Rules Around Accessing Your Retirement Funds Early
Normally, when you stow money away in a retirement account, greatly anticipating beach chairs and golf courses, you aren’t able to access it until you are 59 ½ without paying early withdrawal penalties and taxes associated with receiving the income. For those who find themselves in an emergency situation like a natural disaster or serious illness, deciding whether to utilize their retirement funds and suffer the consequences only adds to the stress.
With the recent Secure Act 2.0 bill, important changes have been made to early retirement withdrawal policies. They have expanded upon the exceptions where you wouldn’t need to pay penalties or taxes. Some examples of these are:
- If you’re at least 50 and are a private firefighter, state & local correction officer, or have worked 25+ years for the same employer.
- If you have an emergency. The definition of an emergency is very broad, and as a result, the maximum distribution is small – $1,000 per year. If you want to take another withdrawal in a following year, you must have fully repaid the first $1,000 withdrawal, 3 years must have passed since the first withdrawal, and the plan has to be funded with contributions of at least $1,000 before the next withdrawal.
- If you live in a federally-declared disaster zone. These are limited to $22,000, must be taken within 180 days of the disaster, and must either be repaid within 3 years or you’ll pay income taxes associated with the withdrawal over a 3-year period.
- If you have a terminal illness. For this – you must have a life expectancy of less than 7 years and the withdrawals must be repaid within 3 years.
- If you are a domestic assault victim. These only apply to certain defined-contribution plans, and are limited to lesser of 50% of the vested balance or $10,000. Distributions must be repaid within 3 years.
Required Minimum Distributions No More
Required minimum distributions (RMDs) are amounts that you are required to take out of your retirement accounts once you reach a certain age. Now, Roth accounts from your employer are no longer subject to RMDs. This benefits those post-retirement ages who are still working and want to continue to let their money grow and not utilize it yet. The age ranges for RMDs have also changed as follows: Born 1950 or earlier- 72 (70 ½ for those of that age prior to 2020), born 1950-1959- 73, born 1960 or later- 75.
Other Changes to Retirement Accounts
Secure Act 2.0 has made a wave of updates to Roth IRAs, including the ability to switch your 529 funds to a Roth account starting in 2024 and allowing SIMPLE and SEP Roth accounts.
Sole proprietors also now have greater flexibility in creating their 401(k)s, allowing better retirement planning for those who are self-employed. Sole Proprietors and single-member LLCs now have the ability now to create Solo 401(k) plans after the end of the year but before you file your individual taxes.
Catch-up contributions have also seen some upgrades, they will be adjusted for inflation and allow extra contributions for those aged 60-63. In addition, Roth accounts will now have catch-up contributions.
Overall, if you are saving for retirement, you want to pay close attention to these changes and see how they might benefit you. They are especially meaningful for those over the age of 50, as they give you greater flexibility over both withdrawing and contributing. As we know financial rules in general can be confusing and tedious, we’re always here to help and happy to answer any questions you have. Contact a ClarkSilva team member today to discuss!
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