close
close

3 new required minimum distribution rules (RMD) that everyone must know before the end of 2024

3 new required minimum distribution rules (RMD) that everyone must know before the end of 2024

One of the biggest benefits of saving in traditional retirement accounts like a 401(k) or IRA is the tax benefit that you receive in advance. You do not owe income tax on the premiums in the year that you pay them. This can now earn you extra money, allowing you to save more for your pension.

But you can’t defer those income taxes forever. Ultimately, Uncle Sam wants his share. That is why the tax authorities impose this required minimum distributionsor RMDs. As the name implies, account holders subject to RMDs are required to withdraw a certain amount from their accounts. RMDs apply to anyone age 73 or older and may also apply to inherited IRAs regardless of the age of the account holder.

The penalty for missing an RMD can be quite high – up to 25% of the amount you should have withdrawn – and you’ll still have to take the distribution and pay income taxes on top of that. So you don’t want to miss filing an RMD on time (usually by December 31 of each year).

Unfortunately, the rules are constantly changing, so it is paramount to make sure you follow the most recent rule changes to ensure you don’t owe Uncle Sam a large fine. Here are three newly updated RMD rules that everyone should 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 collecting your full RMD on time is avoiding unnecessary withdrawals from a tax-sheltered account. That’s why every retiree should know that Roth 401(k)s are now exempt from RMDs following the passage of the Secure 2.0 Act.

Previously, avoiding RMDs in a Roth 401(k) was required rolling over the money from a Roth 401(k). to a Roth IRA, which does not require minimum distributions. However, that process could result in investors losing access to certain investment options they liked in their 401(k).

An additional challenge could arise for anyone who has never opened a Roth IRA before. By opening a new Roth IRA and rolling money into it, they are subject to the five-year rule. All income from your investments is locked up for five years starting from the year you open your first Roth IRA if you want to avoid taxes and penalties. As a result, retirees may have less access to their retirement savings.

The new rule solves that headache, putting the Roth 401(k) on par with the Roth IRA.

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

The Secure Act made some big changes inherited IRAs. Instead of being able to stretch withdrawals throughout your lifetime, called a stretch IRA, most beneficiaries now must 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 out the stretch IRA. You will have a required minimum distribution this year as a result.

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, individuals with disabilities, and beneficiaries who are less than 10 years younger than the original owner. .

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

However, beneficiaries will have to start using RMDs in 2025, according to a ruling released this year by the IRS. They will also still have to divide the entire bill within ten years of inheriting it. As such, it may make sense to still take a distribution this year unless you expect a decline in your personal income (and tax rate) before the ten-year deadline expires.

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 (QCD). A QCD allows you to make distributions directly from an IRA to a qualified nonprofit, and the good news is that a QCD counts toward your RMD. The IRS increased the limit for QCDs to $105,000 in 2024, up from $100,000 previously.

Keep in mind 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 distributions from an IRA and have them count toward the RMD requirements for your 401(k).

Distributing money directly from your IRA to charity offers a great financial benefit. The distribution never appears as gross income like a regular distribution would. While you could take a benefit and then donate to charity for the tax deductionyou must itemize your deductions to get the tax benefit.

With a QCD, you can donate to charity and take the standard deduction without missing out on the tax benefits. That can result in lower income taxes, lower the percentage of Social Security income subject to taxes and lower your 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 charities to lower their RMDs and keep their taxes low.

The $22,924 Social Security bonuses that most retirees completely overlook

If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could give your retirement income a boost. For example, one simple trick can save you as much as $22,924 more… every year! Once you learn how to maximize your Social Security benefits, we think you can retire confidently, with the peace of mind we’re all looking for. Click here to find out how you can learn more about these strategies.

Check out the “Social Security Secrets” »

The Motley Fool has one disclosure policy.