RMD Rules Have Changed Again: What You Need to Know

In 2024, the required minimum distribution (RMD) rules for individual retirement accounts and 401(k)s have changed for the fifth consecutive year. If you have inherited retirement assets, or you have a Roth 401(k), or you want to give tax-free retirement money to charity, this year’s changes to the RMD rules may be important to you.

If you turned 73 or older last year or this year, it’s important to understand your RMD obligations. The non-compliance penalty was reduced last year, but can still be quite steep, amounting to up to 25% of your mandatory distribution if you don’t take it on time.

The general principle of RMDs is pretty simple: when one reaches a certain age, one can withdraw the money saved over all these years on a tax-free basis, after which the government takes its share. The money drawn is considered part of your income and hence is subject to income taxes, except any portion withheld after tax.

However, frequently changing rules in recent years can create confusion. Some changes have been made by permanent laws that were passed by Congress, while other measures have come and gone as part of Covid relief.

“I’ve never seen it be this complicated to withdraw money from an IRA,” says Ed Slott, a Rockville Centre, N.Y. Accountants who specialize in IRA advice. “The IRS makes rules, then rescinds them, then changes the rules. Why not make it simple?”

Here’s a look at the RMD rules and the various changes that came into effect this year:

The RMD age threshold stands at 73

IRA owners are required to begin taking annual RMDs after age 73. This age limit was increased from 72 to 73 last year, which increased from 70½ in 2020. This rule will remain in effect until 2033, when it will increase to 75.

The amount you need to withdraw annually depends on the size of your account, your life expectancy, your marital status, and other factors.

For example, if you are single, your spouse is not younger than 10 years of age, or your spouse is not the sole beneficiary of your account, your annual RMD at age 74 from a $500,000 account is: That would be $19,607.84, or $24,753.48 at age 80. As you age, the percentage you have to withdraw per year increases.

If you turn 73 this year, the deadline to take your first RMD is April 1, 2025.

However, advisors caution that postponing your first RMD could push you into a higher tax bracket. Only your first RMD can be postponed until the next year, so you’ll also need to take your 2025 RMD by the end of next year.

RMDs are also required from 401(k)s and similar tax-free accounts, as long as you’re working for the employer sponsoring your plan.

If you’re still on the payroll and if your stake in your company isn’t 5% or more, you can wait to take RMDs from your plan until you retire.

If you have multiple IRAs, you’ll have to calculate your RMD from each, but you can make total withdrawals from one account. RMDs for 401(k)s must be calculated and withdrawn separately.

Roth 401(k)s are newly exempt from RMDs

Starting this year, Roth 401(k) owners are no longer required to take RMDs, but the rules are different for beneficiaries.

This change makes Roth 401(k) rules the same as the old Roth IRA rules—both accounts can now grow tax-free for the owner’s lifetime.

But if you had to take an RMD from your Roth 401(k) last year, even if it was your first RMD year and you had until April 1 of this year, you’ll have to meet the requirement by 2023.

Some Beneficiaries may be able to postpone withdrawals

Most non-spousal IRA beneficiaries have until the end of ten years to withdraw all assets from the inherited account.

But for non-spouse beneficiaries who inherited IRAs after January 1, 2020, and whose owners were already taking RMDs, the IRS set a requirement that beneficiaries continue to take annual RMDs during the 10-year drawdown period. have to keep.

So far, however, the IRS has waived this strict rule every year since 2020, and last week, it did the same for 2024, allowing beneficiaries to skip annual RMDs as long as the inherited account is 10 years old. Make oneself empty within.

More RMDs can be split between charitable strategies

Next year, IRA philanthropists will be permitted to donate $105,000 of their IRA assets to charity—up from $100,000 this year—and count it toward their RMDs, and use $53,000 to create a charitable trust or gift annuity can be done.

This is called a qualified charitable distribution, or QCD, and the $105,000 donation does not count as taxable income.

QCDs can be made directly to charity, but IRA owners can only make a maximum allocation to a charitable trust or gift annuity. If you give $53,000 to QCD in a trust or annuity this year, you can’t do that again.

With a charitable gift annuity, a charity invests your donation and gives you a fixed income stream for life. These have become more attractive as interest rates rise—the higher the interest rate, the higher the annual income.

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