A Roth 401(k) is a solid option for retirement savers, especially those who don’t anticipate finding themselves in a lower tax bracket when they retire. A Roth 401(k) works similarly to other retirement savings accounts — you put your money in it, invest in various stocks and bonds, and then take withdrawals when you retire. The big difference, though, is that you put money in a Roth account after it’s been taxed, meaning your dispersals in retirement are not taxed. While a Roth already has advantages, the recently passed SECURE 2.0 Act adds another reason to consider a Roth account — eliminating required minimum distributions, giving you even more control over your money.
Required minimum distributions (RMDs) are put in place by the government to force retirees to start taking money out of their retirement accounts at a certain time. RMDs used to start at age 70, but after the passage of the first SECURE Act in 2019, that age was bumped up to 72. The SECURE 2.0 Act, passed in 2022, raises it to 73 and will eventually increase the age to 75.
RMDs are in place because, with most retirement accounts, the money has never been taxed. The government, understandably, wants its cut — and doesn’t want savers to hoard the money tax-free for too long.
There is an RMD table that tells you how much money you have to take out each year based on your age. As you get older, the amount you are required to withdraw gets bigger. Missing an RMD can result in serious penalties, so if you are saving in an account that is subject to RMDs, make sure you’re keeping up with how much you need to take out each year.
Roth 401(k) RMDs Are No More
Currently, RMDs are required for most retirement savings accounts including 401(k) plans, traditional IRAs and Roth 401(k) plans. Notably absent from that list are Roth IRAs. As noted above, a Roth plan is filled with money that has already been taxed, and withdrawals are not taxed. For this reason, RMDs aren’t needed; Uncle Sam has already gotten his cut, so you can keep it in your plan for as long as you want.
Roth 401(k) plans, though, are currently subject to the same RMD rules as traditional plans. Starting in 2024, though, that will no longer be true — meaning if you save already-taxed money in a Roth 401(k), you can let it grow tax free for as long as you want.
The Bottom Line
Currently, Roth 401(k) users still have to stick to the required minimum distribution calendar, despite the fact that they already paid taxes on the money populating their account. A new rule in the SECURE 2.0 Act, though, would change that, allowing Roth 401(k) savers to keep their money growing tax-free for as long as they want.
Retirement Planning Tips
- A financial advisor can help you make the most of your retirement savings plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If your company offers an employer match, make sure you take advantage of it — otherwise you are literally passing up on free money, which no one wants to do.
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