Retirement accounts like a 401(k) and IRA come with a lot of advantages. Incentives like matching contributions, tax deductions and credits, and tax-free growth can help supercharge your retirement savings.
You can't avoid taxes on your retirement savings indefinitely, though. Eventually, the government will want you to start withdrawing money from those accounts, which may come with a hefty tax bill. That's why it imposes required minimum distributions, or RMDs for short.
While RMDs are typically a concern for retirees, it's important for everyone to know the rules. It never hurts to plan ahead, and if you inherit a retirement account, you may be subject to RMDs well before reaching retirement.
The penalties for not following the rules can be steep, so it's best to stay up to date. Recent legislation has instituted several new RMD rule changes that everyone needs to know about in 2024.
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1. Required minimum distributions no longer apply to Roth 401(k)s
The Roth 401(k) is growing in popularity, and it just got a little bit better in 2024.
While the Roth IRA was never subject to RMDs, you used to have to start taking RMDs from your Roth 401(k) at the same age as a traditional 401(k) or traditional IRA. There was a workaround, though. You could rollover your Roth 401(k) into a Roth IRA.
That would solve the problem of having to take RMDs, but it could also create another problem due to the five-year rule. The five-year rule requires you to have established your Roth IRA for at least five years before you can withdraw the earnings from the account on a tax-free basis. If you open a Roth IRA for the first time when you rollover your Roth 401(k), you could be prevented from withdrawing as much as you need from the account without paying unnecessary additional taxes.
Starting in 2024, that's no longer an issue. You can keep your Roth 401(k) and you'll have full access to all of the money in your account. At the same time, you won't have to withdraw more than you need due to RMDs, so you can keep the account growing tax-free.
2. Those who inherited IRAs since 2020 can avoid taking RMDs in 2024
If you inherit an IRA, you may be subject to RMDs.
Under the SECURE 2.0 Act of 2022, if you inherit an IRA from someone who's already started required minimum distributions, you must continue making those RMDs every year. You must fully deplete the account by the 10th year. These rules apply to non-spouse beneficiaries, with a few exceptions for disabled beneficiaries.
But the IRS is giving taxpayers some reprieve since the rule change went into place. Anyone who inherited an IRA subject to annual RMDs between 2020 and 2024 will not have to make a distribution this year if they don't want to. They still have to deplete the account within 10 years, though.
Since you'll have to pay income taxes on any amount withdrawn from your inherited IRA, you may want to defer withdrawals this year. That can give you more time to plan for your taxes in future years. That said, since you have to deplete the entire account within 10 years, it may decrease your overall tax liability to space it out more evenly. Having the flexibility never hurts, though.
3. Those 70 1/2 and older can lower RMDs by up to $105,000 per year
If you have millions saved for retirement in your IRA, you might be looking at a hefty required minimum distribution each year. You might also be inclined to give some of your fortune away to charitable causes.
The IRS gives seniors with big IRA balances a great way to donate to charity called a qualified charitable distribution, or QCD. The best part is that QCDs count toward your required minimum distributions.
For 2024, the IRS allows seniors age 70 1/2 or older to make a QCD of up to $105,000 from their IRA. That's up from the previous limit of $100,000. That's an individual cap, so married couples could donate up to $210,000 from their IRAs. Note that QCDs only apply to IRAs. Employer-sponsored defined contribution plans like a 401(k) aren't eligible.
QCDs are a great way to donate. Not only do they count toward required minimum distributions, but the distribution is completely tax-free. That means you can still take the standard deduction on your taxes instead of itemizing to get the charitable contribution deduction. As a result, you could save even more on your tax bill.
Even if you don't have the money or desire to donate $105,000 from your IRA each year, you can still used a QCD to drastically reduce your required minimum distributions and your tax bill.
