The Internal Revenue Service has reviewed the formula that is used to calculate the required minimum distributions for 401(k) accounts and traditional retirement accounts. They have made a change that will benefit many seniors, and we will look at it in this post.
Traditional Individual Retirement Accounts
Before we focus on the point of this post, we will share some broader information about individual retirement accounts and 401(k)s. A traditional individual retirement account is funded before taxes are paid on the income. This applies to 401(k) plans as well.
In the near term, you get a tax break, because you are making less taxable income. Since these are retirement accounts, there is another angle. You would presumably be in a lower tax bracket when you retire, so the deferred taxation would be an advantage.
The qualifier “deferred” is significant. Taxes must be paid eventually, and this is why there are required minimum distributions (RMDs). You have started taking money out of your 401(k) or traditional IRA when you are 72 years of age.
Roth individual retirement account holders are not required to take distributions at any time. This is because of the fact that contributions into this type of account are made after taxes have been paid on the income.
You can take money out of either type of account without being penalized when you are 59.5 years old. This is a blanket statement as it applies to traditional accounts, but Roth account holders can withdraw portions of the principal at any age without being penalized.
2022 Traditional IRA and 401(k) RMD Rates
The required minimum distribution amounts are based on the life expectancy of someone that has reached the RMD age threshold. At the present time, the life expectancy for someone that is 72 is just over 86 years, and it was 84 years when the RMD table that was used last year was created.
As a response, the IRS has adjusted the rates, so the RMDs are lower in 2022. To provide an example, someone that is 72 years of age with $600,000 in a 401(k) would be required to withdraw $21,898 this year.
In December of 2019, the SECURE Act was enacted by Congress, and it went into effect in 2020. We have touched upon the fact that the RMD age is 72 right now, but it was 70.5 before this measure was enacted.
From an estate planning perspective, this piece of legislation includes a provision that eliminated a popular strategy. Since its enactment, all assets must be withdrawn from an inherited individual retirement account within 10 years.
Prior to the enactment of the SECURE Act, there was no particular time limit, so beneficiaries of individual retirement accounts could maximize the tax benefits.
Another change gave traditional account holders the freedom to contribute into their accounts as long as they are earning income. They were prohibited from doing so once they reached the required minimum distribution age before this measure became law.
SECURE Act 2.0
Last year, the Securing a Strong Retirement Act of 2021 was introduced into Congress, and it is being referred to as SECURE Act 2.0. Under the terms of this measure, employers would be compelled to enroll eligible employees into their 401(k) plans.
The RMD age for traditional account and 401(k) account holders would be increased from 72 to 75, and the change would be implemented gradually. The catch-up 401(k) contribution for workers between 62 and 64 years of age would rise to $10,000.
Employers would have the ability to provide 401(k) matches of qualified student loan payments that are made by eligible employees. The savers credit for people in lower tax brackets would go from $1000 to $1500, and more people would be eligible.
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