New Tax Rules for Retirement Accounts

Recent federal legislation has reshaped the rules for retirement savings, introducing adjustments that affect how individuals prepare for their post-work years. These modifications, stemming from the SECURE 2.0 Act, affect nearly every aspect of retirement planning. The changes have direct consequences for current savers, those approaching retirement, and the beneficiaries who will inherit these accounts.

Required Minimum Distribution (RMD) Age Adjustments

A primary change involves the age at which owners of retirement accounts must begin taking Required Minimum Distributions (RMDs). Previously, the starting age was 72, but new legislation has pushed this date back, giving investments more time to grow in a tax-deferred environment. This delay directly impacts retirement withdrawal strategies and long-term tax planning.

The RMD age is now determined by an individual’s birth year. For those born between 1951 and 1959, the RMD starting age is 73. For individuals born in 1960 or later, the starting age is also 73, but it is scheduled to increase to 75 in 2033. This tiered approach means financial planning for RMDs requires attention to specific birth dates.

While the starting age for RMDs has changed, the method for calculating the distribution amount remains the same. The IRS Uniform Lifetime Table is still the basis for determining the percentage of the account that must be withdrawn each year. The penalty for failing to take a required distribution has been reduced from 50% to 25% of the shortfall, and it can be further reduced to 10% if the mistake is corrected in a timely manner for IRAs.

Inherited Retirement Account Distribution Rules

The regulations for beneficiaries of inherited retirement accounts have undergone a transformation. Previously, many non-spouse beneficiaries could “stretch” distributions over their own lifetime, but this “stretch IRA” concept has been largely eliminated for most beneficiaries under the rules established by the SECURE Act.

A select group known as Eligible Designated Beneficiaries (EDBs) can still take distributions over their life expectancy. This category includes:

• The surviving spouse of the account owner
• Minor children of the owner
• Individuals who are disabled or chronically ill
• Beneficiaries who are not more than 10 years younger than the deceased account owner

For minor children, the account must be fully distributed within 10 years after they reach the age of majority.

Most other individual beneficiaries, such as adult children or grandchildren, are now subject to a 10-year rule, which mandates that the entire balance of the inherited account must be withdrawn by the end of the tenth year following the original account owner’s death. If the original owner died after they were required to begin taking RMDs, the beneficiary must also take annual distributions in years one through nine. The IRS has provided temporary relief by waiving penalties for any missed annual distributions through 2024, but this does not change the final deadline to empty the account.

For non-designated beneficiaries, which include entities like an estate or a trust that doesn’t meet specific requirements, the rules have not changed. These beneficiaries are subject to a 5-year rule if the owner died before their required beginning date for RMDs, meaning the account must be fully liquidated by the end of the fifth year after the owner’s death.

Updates to Contribution Regulations

New provisions have altered how and how much money can be contributed to retirement accounts. Starting in 2026, individuals age 50 or older who earned more than $145,000 in the prior year must make their 401(k) catch-up contributions on a Roth basis. This means the contributions are made with after-tax dollars, so qualified withdrawals in retirement will be tax-free.

Beginning in 2025, individuals aged 60 through 63 can make a larger catch-up contribution. This higher limit is the greater of $10,000 or 150% of the regular catch-up amount. For 2025, the regular catch-up is $7,500, making the higher limit $11,250. These amounts are indexed for inflation.

Employers are now permitted to make matching contributions to an employee’s retirement plan based on that employee’s qualified student loan payments. The employee’s regular loan payments trigger a corresponding employer contribution into their retirement account. This helps individuals save for the future while managing their educational debt.

New Penalty-Free Withdrawal Options

The law has expanded the circumstances under which individuals can withdraw funds from their retirement accounts before age 59½ without incurring the standard 10% early withdrawal penalty. These new exceptions are designed to provide financial flexibility during times of personal hardship.

One such provision allows for penalty-free withdrawals for individuals diagnosed with a terminal illness. Another new option is available for survivors of domestic abuse, who may withdraw the lesser of $10,000, a figure that will be indexed for inflation, or 50% of their vested account balance without penalty.

Individuals impacted by federally declared disasters can also access their retirement funds more easily. A provision allows for penalty-free distributions of up to $22,000 for those who have suffered an economic loss due to such an event. The withdrawal must typically be made within a specific timeframe following the disaster declaration.

A new rule addresses smaller, immediate financial needs. Account holders can now take a penalty-free withdrawal of up to $1,000 per year to cover unforeseeable or immediate personal or family emergency expenses.