Major IRA Rule Changes You Need to Know

Recent legislation, primarily the SECURE 2.0 Act enacted in late 2022, has introduced updates to the rules for Individual Retirement Arrangements (IRAs). These changes affect various aspects of retirement savings, from contribution limits to withdrawal rules. The updates are designed to expand retirement savings opportunities for many individuals.

Adjustments to Contributions

For 2025, the maximum annual contribution for both Traditional and Roth IRAs is $7,000 for individuals under the age of 50. This limit is subject to inflation adjustments in subsequent years. Savers aged 50 and over have an additional “catch-up” provision that allows them to contribute more than the standard limit. For 2025, this catch-up amount is an extra $1,000, bringing their total possible contribution to $8,000.

A change takes effect in 2025, introducing a new, higher catch-up contribution limit for individuals aged 60, 61, 62, and 63. This allows them to contribute an even greater amount to their IRAs during their final working years. The higher limit is the greater of $5,000 or 50% more than the regular catch-up contribution amount for that year. This amount will be indexed for inflation in future years.

An update, originally set for 2024 but delayed until 2026, impacts high-income earners. Individuals with wages exceeding $145,000 in the prior calendar year will be required to make their age 50+ catch-up contributions to a Roth account. This means the catch-up portion of their savings will be made with after-tax dollars.

New Rules for Required Minimum Distributions

The age at which IRA owners must begin taking Required Minimum Distributions (RMDs) has been increased to 73. This means individuals who turn 73 in 2025 do not have to take their first RMD until April 1, 2026.

This change provides an additional year for retirement funds to grow tax-deferred before withdrawals become mandatory. Individuals who had already started taking RMDs because they turned 72 in 2022 or earlier are not affected by this change and must continue taking their distributions as scheduled. The law also includes a future increase, pushing the RMD age to 75, which is scheduled to take effect in 2033.

The financial penalty for failing to take a required distribution has also been reduced. Previously, the penalty was 50% of the amount that should have been withdrawn. Under the new rules, this excise tax has been lowered to 25%.

Furthermore, the penalty can be reduced even more if the mistake is corrected promptly. If the account owner withdraws the missed RMD and files an amended tax return, typically within a two-year correction window, the penalty drops to just 10%.

Expanded Early Withdrawal Exceptions

The SECURE 2.0 Act introduced several new exceptions to the 10% additional tax on early distributions from an IRA before age 59½.

• Emergency expenses: An individual can withdraw up to $1,000 per year for unforeseeable or immediate financial needs relating to personal or family emergency expenses. This withdrawal is not subject to the early withdrawal penalty, and the taxpayer has the option to repay the distribution within three years.
• Victims of domestic abuse: An individual can withdraw the lesser of $10,000 or 50% of their vested account balance within one year of being a victim of domestic abuse. The law allows for self-certification to qualify for this exception, and the withdrawn amount can also be repaid over a three-year period.
• Terminal illness: An individual diagnosed with a terminal illness, certified by a physician as having an illness or physical condition that can reasonably be expected to result in death in 84 months or less, can take distributions without the 10% penalty.
• Federally declared disasters: Individuals whose main home is in a qualified disaster area can take distributions of up to $22,000 per disaster. These distributions are not subject to the 10% early withdrawal penalty and can be included in income over three years. The withdrawn funds can also be repaid to the retirement account.

New Rollover and Employer Contribution Options

A change allows for rollovers from long-term 529 college savings plans to Roth IRAs. To be eligible, the 529 plan must have been maintained for at least 15 years. The rollover amount is subject to the annual IRA contribution limit, and there is a lifetime maximum of $35,000 that can be moved from a 529 plan to a Roth IRA. The rollover must be made directly to a Roth IRA in the name of the 529 plan’s beneficiary.

Another option allows employers to help employees save for retirement while they are paying off student loans. Employers can now make matching contributions to an employee’s retirement account, such as a SIMPLE IRA or SEP IRA, based on the employee’s qualified student loan payments. This means an employee’s loan payments are treated as if they were contributions for the purpose of receiving an employer match. This rule helps younger workers who may be unable to contribute to a retirement plan because of student debt.