Emergency 401(k) and IRA Withdrawals Now Allowed Without Penalty starting in 2024

Unforeseeable or immediate financial needs relating to personal or family emergency expenses of up to $1,000 may now be withdrawn from a retirement plan without paying the 10% penalty (but still paying tax on tax-deferred money) up to once a year. You may also repay the $1,000 back into the plan (and presumably get a tax deduction for doing so) for three years. If you do repay it, you can do it again next year. If you do not repay it, you have to wait three years before taking another one. This one isn't going to do much for readers of this blog, but it should encourage low earners to save more for retirement without worrying about needing that money to replace the washing machine. Starts in 2024.

 

Paying taxes on tax-deferred retirement accounts

"Q: My wife has a 403(b) account. We have read that if we were to withdraw money to, say, pay off our mortgage, the government will tax the withdrawal. Is this true, and if so, why is there a tax on those funds, especially for seniors?

A: I get this question quite a bit.

People have saved for decades in tax-advantaged retirement plans such as a 401(k) or 403(b) looking forward to the time they can tap the money. But it’s a rude awakening when they realize the taxes that are owed. It seems unfair because what’s on paper is not what they will net.

But that’s the bargain you agreed to when you were allowed to invest pretax money into such plans. Eventually, the IRS will want its cut. This is also why there are required minimum distributions or RMDs.

“You cannot keep retirement funds in your account indefinitely,” the IRS reminds taxpayers.

If you don’t take any distributions, or if your RMD is not large enough, you may have to pay a 50 percent tax on the amount not withdrawn as required.

As the IRS explains it, your required minimum distribution is the minimum amount you must withdraw from your account each year. You generally have to start taking withdrawals from your retirement plan account or IRA when you reach 72. It used to be 70 ½. Roth IRAs do not require withdrawals until after the death of the owner.

Here are the retirement accounts that fall under the RMD rules:

— Employer-sponsored retirement plans, including profit-sharing plans and 401(k), 403(b) and 457(b) plans.

— The Thrift Savings Plan (TSP), the federal government’s version of a 401(k).

— Roth 401(k). Even though you don’t have to pay income tax on the withdrawal, you still have to take an RMD. A Roth IRA does not require withdrawals until after the death of the owner.

— Traditional IRA.

— Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE).

But there are always exceptions and caveats in tax law. The IRS has an FAQ page if you need additional information.

So, yes, as frustrating as it may be, your withdrawals will be included in your taxable income."

Thanks to Michelle Singletary, author of "Color of Money" column in The Washington Post.

 

2020: Increased limits for employee contributions to retirement plans

The IRS limit on annual employee contributions to 401(k)s, 403(b)s, most 457 plans and the federal government's Thrift Savings Plan will rise to $19,500 next year, up from $19,000 in 2019 .

The limit for IRAs remains $6,000 or $7,000 for ages 50 +.

Tracking down long-lost retirement account from previous employment

"If you've worked for more than one employer in your lifetime, you may have lost or forgotten retirement benefits just waiting for you to track them down. Here's how to find and claim those long-lost accounts."
Get the details from The Motley Fool at: https://www.fool.com/retirement/2017/11/01/how-to-find-your-lost-retirement-benefits.aspx

Roth vs. regular 401(k)s

Traditional 401(k) or Roth 401(k)?
"Workers usually don’t know the difference. Yet employers increasingly are asking them to choose." "The difference in the two types of plans is the timing of federal income taxes." Get the details from the Squared Away blog at: http://squaredawayblog.bc.edu/squared-away/the-411-on-roth-vs-regular-401ks/

Make your money last as long as you do

While there are a variety of strategies for spending down retirement investments to try to last for a lifetime, the only sure way to accomplish this is through the purchase of single payment life annuities (SPIAs). Lewis Mandell, Ph.D. explains why annuities are ideal for accomplishing this task in his book "What to do when I get stupid: A radically safe approach to a difficult financial era." See: http://lewismandell.com/. At the same time that our ability to make prudent financial decisions declines with age (after peaking at age 53 and really declining after age 70), confidence in our abilities actually increases! This is a scary combination well documented by extensive research. "The two major questions posed in the book ask how we can generate sufficient guaranteed real income to last the rest of our lives, not matter how long we live and what are the best ways to protect our lifetime income against possible irrational decisions of our future selves" (p. 152). This is a MUST READ for everyone approaching or in retirement AND for their children. I've heard too many stories of how elderly parents were taken advantage of by financial professionals with dubious interests, and by outright fraudsters, draining assets meant for heirs and leaving the adult children to support their parents.

Find a Job With Good Retirement Benefits

Trying to invest for retirement without the help of a generous employer is like Sisyphus, a figure of Greek mythology, who was condemned to repeat the task of pushing a boulder up to a mountain, only to see it roll down again… over and over… forever.  But young adults starting their careers can make astute decisions about where to apply for positions. “How to Find a Job With Good Retirement Benefits” by Emily Brandon, provides great help about what types of employers are likely to provide pensions, robust 401(k) plans and other pertinent advice at: http://money.usnews.com/money/blogs/planning-to-retire/2015/05/15/how-to-find-a-job-with-good-retirement-benefits