One of the biggest advantages of saving for retirement in an account like an IRA or 401(k) is that you can defer your taxes. Instead of paying a big tax bill upfront, you can wait to pay taxes until you're in retirement. That can give you more money to invest today.
But eventually, the government comes asking for its tax revenue. That's why it imposes required minimum distributions. Seniors must start withdrawing funds from their retirement accounts and pay taxes on those withdrawals.
If you don't know all the rules for required minimum distributions, it could result in some stiff penalties. Failing to make a required minimum distribution on time could result in a penalty equal to 25% of the amount you were supposed to withdraw. Plus, you still have to make the withdrawal and pay regular income taxes.
Adding to the complications, recent legislation has resulted in a lot of changes around the RMD rules. Here are three new rules retirees need to know about in 2024.
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1. Required minimum distributions begin at 73, but you can choose to delay your first distribution
Under the SECURE Act 2.0, the new required minimum distribution age is 73. This went into effect for anyone who turned 73 in 2023 (born in 1950).
The government will actually give you three extra months to make your first distribution. The deadline for your first withdrawal is April 1 the year after you turn 73. However, you'll have to make your second distribution by Dec. 31 of that year.
That could result in an extra-large tax bill if you take two minimum withdrawals in the same year. Be sure to take that into account if you plan delaying your first RMD into the year after you turn 73.
There is an exception, though. You don't have to take RMDs from a defined contribution plan like a 401(k) until after you retire (if your plan allows for it). This only applies to your current employer's 401(k) plan. The first RMD is due the year after you retire instead of the year after you turn 73.
2. Required minimum distributions no longer apply to Roth 401(k)s
If you've opted to save in your employer's Roth 401(k) instead of a traditional tax-deferred account, your account is exempt from the RMD rules. This rule went into effect at the start of 2024, and it puts the Roth 401(k) on par with the Roth IRA, which also doesn't have required minimum distributions.
It used to be possible to avoid RMDs from a Roth 401(k) by rolling over funds to a Roth IRA. However, the process could result in investors losing access to certain investment options they liked in their old plan.
What's more, rolling over a Roth 401(k) into a Roth IRA could present a problem for retirees who never opened a Roth IRA before. They'll be subject to the five-year rule, which prevents you from withdrawing earnings on your investments in a Roth IRA within five years of opening an account. That could end up giving retirees less access to their own retirement savings than they need.
The new rule solves that issue and puts the Roth 401(k) on equal footing with a Roth IRA.
3. Charitable gifts can now lower your RMD by up to $105,000 per year
If you have more money in your retirement accounts than you need to fund your retirement spending plans, you may be looking for ways to get around RMDs. Being forced to withdraw funds in excess of your spending needs results in a hefty tax bill. The good news is you can avoid those taxes by using a special distribution called a qualified charitable distribution.
If you distribute funds directly from your IRA to a qualified non-profit, it counts toward your required minimum distribution. Note, this rule only applies to IRAs; defined contribution plans like a 401(k) don't get the same treatment. For 2024, you can distribute up to $105,000 (up from $100,000 previously) from your IRA to charities. That's an individual cap, so a married couple could distribute up to $210,000.
Distributing funds to charity directly from an IRA has several big advantages. The distribution never impacts your gross income. This effectively takes what would be an itemized tax deduction -- charitable contributions -- and makes it an above-the-line deduction. That can result in lower taxes on Social Security income, lower Medicare premiums, and the option to take the standard deduction instead of itemizing, further lowering your tax bill.
You can start making qualified charitable distributions at age 70 1/2, well before your RMDs start. They may still be a great tool for those charitably inclined retirees with big IRA balances. Even if you donate much less than the new $105,000 limit, it can be a great way to reduce your tax bill.
