Roth Employer Retirement Plans Becoming More Important

Parts of the retirement legislation Secure 2.0 continue to be implemented. Did you realize that in 2024, your Roth employer retirement plans were no longer subject to Required Minimum Distributions (RMDs)? I personally think Roth accounts are great sources for financing long-term care in the later years of your retirement. Since you do not have to take the money out, you can leave the money there to grow as long as possible.

Secure 2.0 also allowed employers to put company matches into your Roth account. Who wouldn’t want free money going into an account that you can withdraw tax-free from after age 59 1/2. What’s the catch? The employer match will now become part of your taxable income.

Big changes to retirement catch-up contributions start in 2025. Catch-up contributions have been around since 2001 and are allowed for those age 50 and older (in addition to the employee contribution limit). The catch-up amount will rise to $7,500 in 2025. Those aged 60 to 63 can contribute even more - $11,250. You need to be aged 60 to 63 on the last day of the calendar year to be eligible for this super catch-up. You can put this super catch-up in either a Traditional or Roth employer retirement account. This means someone in their early sixties can put $34,750 ($23,500 + $11,250) away for retirement in 2025.

Some bad news is coming for higher income earners age 50 and older in 2026. If you make more than $145,000 in 2025 (this amount may be indexed upward), all catch-up contributions must go into a Roth employer retirement account. You will lose an important tax deduction. On the bright side, these monies will not be subject to RMDs and will be tax-free when withdrawn.

When I was a finance professor, my students would sometimes ask me “Do we need to know dates?” When it comes to retirement planning, dates certainly do matter!

Happy New Year from The Everyday Financial Planner!