Key Retirement Account Rules You Should Know
While the definition of retirement may change from person to person, the key to developing a great retirement savings plan is centered around three terms. Knowing them and what they mean to you BEFORE you retire can make a big difference to you in retirement.
- Catch-up contributions. In addition to the annual contribution limits set within each qualified retirement saving plan is a bonus contribution. When you’re age 50 or older, you can choose to make additional contributions to your retirement plans. For 2024, maximum catch-up contributions are:
- $7,000 when you participate in a 401k, 403b and 457b
- $3,500 for your SIMPLE IRA or SIMPLE 401(k)
- $1,000 for traditional or Roth IRAs
Planning tip: This added money sheltered from income tax can really add up over the years. Remember, each year is a separate savings opportunity. If you fail to take advantage of the catch-up contribution this year, the tax opportunity is lost forever. Consider tracking your monthly expenses and identify where you can save a little money. Use this extra savings to fund your catch-up contribution.
- Hardship withdrawals. The IRS defines a hardship withdrawal as taking money from a qualified retirement account for immediate and heavy financial need such as medical or funeral expenses. While hardship withdrawal is defined by the IRS, the availability of the distribution still resides with the program administrator and the rules of your particular plan. This is your employer with 401(k)s and 403(b)s.
It is important to note that hardship withdrawals are separate from the early withdrawal penalty. The amount you withdraw is not a loan, so you won’t be able to pay the money back to your account. Instead, hardship withdrawals are income to you and are subject to income tax. They may also limit your ability to make contributions to your account for some time after taking the hardship distribution.
Planning tip: Hardship withdrawal rules are often misunderstood and can put a real dent in your ability to build a nice retirement savings plan. The key here is to know it exists and understand the implications BEFORE you use its rules. Remember there are several exceptions to the 10 percent early withdrawal penalty in retirement accounts that may or may not align with the reasons for hardship withdrawals. For instance, you might avoid the penalty on early distributions from a 401(k) to pay emergency medical expenses, but not to pay your child’s college tuition. - Rollover. A rollover is a transfer of assets from one retirement plan to another. To keep the transaction tax-free, you generally must deposit the assets into the second plan within 60 days. But not all withdrawals are eligible for a rollover. Hardship withdrawals are an example of rollover-ineligible funds.
Planning tip: Consider a direct rollover to avoid taxes and penalties. An indirect rollover (when you request a lump-sum distribution and then take responsibility for completing the transfer, rather than instructing your assets to be sent directly to your new employer) typically has harsh tax consequences.
The retirement savings account options vary, the rules are complex and their terms are often unique.
