The retirement landscape is rapidly changing with new rules and tax laws impacting retirement account contributions and withdrawals. These updates affect nearly all taxpayers, especially those inheriting retirement accounts. Here are six key changes everyone should know for 2024 and 2025.

1. Pre-Tax Catch-Up Contributions for High Earners End Soon: Starting in 2026, thanks to the Secure Act 2.0, employees aged 50 and older earning more than $145,000 (indexed) annually will no longer be able to make catch-up contributions to pre-tax accounts. Instead, catch-up contributions will have to go into after-tax Roth accounts. This is a big change for executives and high-income earners who often use catch-up contributions to reduce taxable income during their peak earning years. However, there may be a brief window for individuals changing jobs mid-year to take advantage of pre-tax catch-up contributions for one or two more years before triggering the income threshold.

2. Inherited IRAs: RMDs for Non-Spouse Beneficiaries: Starting in 2025, non-spouse beneficiaries who inherit retirement accounts from someone already taking required minimum distributions (RMDs) will need to start annual RMDs themselves. Beneficiaries must also empty the inherited account within 10 years. If the original account owner had not yet reached RMD age, only the 10-year rule applies. These rules are complex, so it's critical to consult a financial advisor to navigate the specific requirements.

3. New Inherited IRA Rules for Spouses: Surviving spouses have more flexibility under new inherited IRA rules, which allow them to use their deceased spouse's age to calculate RMDs. Starting in 2024, spouses can elect to be treated as the decedent, using the uniform lifetime table to calculate smaller annual RMDs. This can be particularly beneficial for older surviving spouses who wish to reduce taxable withdrawals. While the rules are nuanced, they provide more options for tailoring retirement income strategies.

4. 529 to Roth IRA Rollovers: A new tax law effective in 2024 allows penalty-free rollovers from 529 college savings plans to Roth IRAs. Taxpayers can roll over up to $35,000 in their lifetime, but annual rollovers are limited to the IRA contribution cap and must include any contributions made to other IRAs in the same year. Additionally, the 529 account must have been open for at least 15 years, and contributions from the last five years aren’t eligible for rollover. This offers a great solution for leftover funds in 529 accounts, allowing them to grow tax-free in a Roth IRA.

5. No More RMDs for Roth 401(k)s: Beginning in 2024, Roth 401(k) accounts will no longer require lifetime RMDs, similar to Roth IRAs. This is good news for those who wish to leave Roth 401(k) funds untouched for as long as possible. However, beneficiaries may still be subject to distribution rules unless the Roth 401(k) is fully funded. The 10-year withdrawal rule may apply to non-spouse beneficiaries, while spouses may have more options, depending on the plan's rules.

6. Expanded Roth Contributions for SIMPLE and SEP IRAs: Since 2023, employers can offer Roth options for SIMPLE and SEP IRAs, and employees can choose after-tax Roth contributions. This allows for immediate vesting and tax-free growth. However, Roth contributions are included in the employee’s gross income for the year. Employers can also make matching contributions to Roth accounts based on student loan payments, adding another layer of flexibility to retirement savings.

With the ever-evolving landscape of tax laws, it’s important to stay updated. Many key provisions of the Tax Cuts and Jobs Act are set to expire at the end of 2025, so additional changes to retirement rules may be on the horizon. Staying informed and planning with a financial advisor is crucial to navigating these shifting regulations.

Talley's team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.