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3 New Required Minimum Distribution (RMD) Rules Everyone Needs to Know Before the End of 2024
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3 New Required Minimum Distribution (RMD) Rules Everyone Needs to Know Before the End of 2024

One of the biggest benefits of saving in traditional retirement accounts, such as a 401(k) or scott is the upfront tax relief you get. You won’t owe income tax on the contributions in the year you make them. This can give you extra money now, allowing you to save more for retirement.

But you can’t defer those income taxes forever. Finally, Uncle Sam wants his cut. That’s why the IRS imposes minimum required distributionsor RMDs. As the name suggests, account holders subject to RMDs are required to withdraw a certain amount of money from their accounts. RMDs apply to anyone age 73 or older and may also apply to inherited IRAs, regardless of the account holder’s age.

The penalty for missing an RMD can be quite large — up to 25% of the amount you were supposed to withdraw — and you’ll still have to take the distribution and pay income tax on top of it. So you don’t want to miss taking an RMD on time (usually by December 31st of each year).

Unfortunately, the rules are always changing, so it’s essential to make sure you follow the latest rule changes to ensure you don’t end up owing Uncle Sam a big penalty. Here are three recently updated RMD rules everyone needs to know before the end of 2024.

A piggy bank with the letters RMD printed on it.A piggy bank with the letters RMD printed on it.

A piggy bank with the letters RMD printed on it.

Image source: Getty Images.

1. Roth 401(k)s are now exempt

Just as important as taking your full RMD on time can be avoiding unnecessarily withdrawing funds from a tax-sheltered account. That’s why every pensioner needs to know this Roth 401(k)s are now exempt from RMD following the passage of the Secure 2.0 Act.

Avoiding RMDs in a Roth 401(k) used to ask transferring funds from a Roth 401(k) to a Roth IRA, which has no required minimum distributions. However, this process could result in investors losing access to certain investment options they enjoyed in their 401(k).

An additional challenge could arise for anyone who has never opened a Roth IRA before. Opening a new Roth IRA and transferring funds into it makes them subject the five-year rule. Any earnings from your investments are locked in for five years from the year you open your first Roth IRA if you want to avoid taxes and penalties. As a result, retirees could end up with less access to their retirement savings.

The new rule solves this headache by putting the Roth 401(k) on equal footing with the Roth IRA.

2. The inherited IRA owner may not have to take a distribution this year

The Secured Act brought some major changes Inherited IRAs. Instead of being able to extend withdrawals over a lifetime, called an extendable IRA, most beneficiaries must now distribute the entire account within 10 years of inheritance. If the original account holder was already subject to required minimum distributions, the beneficiary must also continue to make annual RMDs.

If you inherited an IRA before December 31, 2019, you can still roll over the Extended IRA. You will have to do it minimum required distribution as a result this year.

The new rule applies to anyone who inherited an IRA from someone who died after December 31, 2019. There are exceptions for spouses, children under 21, people with disabilities and beneficiaries less than 10 years younger than the original owner. .

Because of some confusion over the rule changes as written in the SECURE Act, the IRS waived the RMD requirement for newer payees for 2021 through 2024 (the Cares Act waived the RMD for everyone in 2020). So if you inherited an IRA from someone after December 31, 2019, you don’t have to take a distribution this year, even if the original owner was subject to RMDs.

However, beneficiaries will have to start taking RMDs in 2025, according to a ruling released by the IRS this year. They will also have to distribute the entire account within 10 years of inheriting it. As such, it might make sense to take a distribution this year anyway, unless you expect a drop in your personal earnings (and your tax rate) before the 10-year term is up.

3. You can reduce your RMD by up to $105,000 with a charitable distribution

One of the best ways retirees can donate to nonprofits is by using a qualified charitable distribution, or QCD. A QCD allows you to make a distribution directly from an IRA to a qualified nonprofit, and the good news is that a QCD counts toward the RMD. The IRS increased the limit for QCDs in 2024 to $105,000, up from $100,000 previously.

Note that this rule only applies to IRAs. Any savings in a defined contribution plan, such as a 401(k), are still subject to RMDs. And you can’t take a distribution from an IRA and count it toward the RMD requirements for your 401(k).

Distributing funds directly from your IRA to charity provides a great financial advantage. The distribution never appears as gross income like an ordinary distribution. Whereas you could make a distribution and then donate to a charity for tax deductionyou will need to itemize your deductions to get the tax break.

A QCD allows you to donate to charity and take the standard deduction without losing the tax benefits. This can lead to lower income taxes, a lower percentage of your Social Security income that is subject to taxes, and lower Medicare premiums.

You can start making qualified charitable distributions at age 70 1/2, well before RMDs begin. Even if you donate less than the $105,000 limit, they can be a great way for the charitable to lower their RMDs and keep their taxes low.

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