The SECURE Act 2.0 has eliminated the RMD for the Roth 401k.
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Mike Bernard, CFP® offers advisory services through KFG Wealth Management, LLC dba Korhorn Financial Group. This information is for general financial education and is not intended to provide specific investment advice or recommendations. All investing and investment strategies involve risk including the potential loss of principal. Asset allocation & diversification do not ensure a profit or prevent a loss in a declining market. Past performance is not a guarantee of future results….(read more)
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No More RMD for Roth 401(k): A Game-Changer for Retirement Planning
Retirement planning just got a significant boost for individuals who have invested in Roth 401(k) accounts. The passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019 brought about a major change by eliminating the requirement of minimum distributions (RMDs) for Roth 401(k) accounts during the account holder’s lifetime. This policy alteration means that individuals can now potentially maximize their savings and enjoy tax-free growth indefinitely.
What is a Roth 401(k)?
A Roth 401(k) is an employer-sponsored retirement savings plan that combines features of a traditional 401(k) and a Roth IRA. The contributions made to a Roth 401(k) are made on an after-tax basis, meaning that individuals contribute money that has already been taxed. However, the withdrawals made from these accounts are typically tax-free, as long as certain conditions are met.
The former burden of RMDs
Previously, individuals aged 70 ½ or older with a Roth 401(k) were required to withdraw a certain amount, known as the RMD, from their retirement accounts each year. The RMD was calculated based on the account balance and life expectancy. Failure to withdraw the required amount resulted in hefty penalties and tax consequences.
The case for eliminating RMDs for Roth 401(k)s
The rationale behind the elimination of RMDs for Roth 401(k)s is fairly simple. While traditional 401(k) plans have required distributions to ensure tax revenue for the government, the funded withdrawals are no longer essential for Roth 401(k)s since taxes have already been paid on the contributions. Additionally, by removing the RMD requirement, account holders can now leave their funds untouched, allowing for potentially more substantial savings and growth.
Benefits of no more RMDs
1. Increased flexibility: Without the annual obligation to withdraw funds, individuals now have more flexibility to decide whether and when to access their savings. The absence of RMDs allows for account holders to better respond to their personal financial circumstances, whether it be holding off on withdrawals during bear markets or letting the account grow for longer.
2. Tax advantages: Roth 401(k)s offer unique tax advantages, and eliminating the RMD requirement enhances these benefits. By keeping the funds invested for a longer duration, the tax-free growth potential remains intact, offering the opportunity for greater long-term returns.
3. Legacy planning: With no RMD, individuals can potentially pass on their entire Roth 401(k) savings to their heirs in a tax-efficient manner. Having the ability to leave a significant inheritance can greatly enhance one’s estate planning strategy and ensure that future generations benefit from their savings efforts.
Considerations to be aware of
While the elimination of RMDs for Roth 401(k)s may seem like a dream come true for retirement planning, there are a few considerations to keep in mind:
1. Tax diversification: It’s important to have a portfolio with both taxable and tax-free sources of income. Relying solely on Roth 401(k) funds may limit your ability to take advantage of potential tax-planning strategies in the future.
2. Estate tax implications: While no RMDs during the account holder’s lifetime is advantageous, beneficiaries of the Roth 401(k) may still be subject to estate taxes. Consulting a financial advisor or estate planning professional is recommended to navigate potential tax issues.
In conclusion, the removal of RMDs for Roth 401(k) accounts is a game-changer for retirement planning. This change provides individuals with increased flexibility, tax advantages, and legacy planning opportunities. However, it’s crucial to evaluate one’s overall financial strategy and consult with professionals to ensure an optimized retirement plan. The no more RMDs policy has opened up new doors for maximizing retirement savings, empowering individuals to take full control of their financial future.
Does tax still have to be paid on the Employer's match in this Roth401k?
Now, if only they would allow you to pay the taxes out of your traditional on transfer instead of having to cut a check for the taxes owed…..
I CANNOT understand why they will not just allow a person to do it this way. The govt would get a TON of money, right now, to pay off this massive debt by letting people have a 1-time transfer of their traditional to their Roth accounts without them having to claim it on their earned income for the year. Just bill them a flat tax rate based on their household income. Something like 18%.
I and many other younger Americans would transfer over 200K TODAY and pay an 18% tax if they would allow me to do that without having to pay the taxes out of my check book….