Retirement accounts like 401(k)s and IRAs offer valuable tax breaks, but they also come with a lot of rules. These rules apply not only to how much you can contribute and what you can invest in, but also when you can -- and must -- take money out of your account.
Mandatory annual withdrawals known as required minimum distributions (RMDs) used to begin in the year a person turned 70 1/2. Then, the government bumped it up to age 72 before changing the starting age to 73 last year.
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Two more important RMD changes have gone into effect this year, and they could make life a little easier for retirees who have yet to take theirs.
1. RMDs are no longer required from Roth 401(k)s or Roth 403(b)s
Roth IRAs have long been exempt from RMDs. Yet even though Roth 401(k)s and 403(b)s also got funded with after-tax dollars, they still forced participants to take RMDs. It was possible to get around this requirement by rolling your Roth 401(k) or 403(b) funds into a Roth IRA, but this was an extra hoop to jump through.
Beginning this year, it's no longer required. All Roth retirement account funds are exempt from RMDs, so you're free to leave these funds in your account as long as you'd like. You don't have to spend it at all if you don't want to.
The IRS will continue to expect a slice of tax-deferred savings, like those found in traditional 401(k)s, 403(b)s, and IRAs, from all adults 73 and older. However, if you just turned 73 in 2024, you have until April 1, 2025, to make your RMD for this year. In subsequent years, though, you must make your RMDs by Dec. 31 of that year.
2. Qualified charitable distribution (QCD) limits are increasing
Qualified charitable distributions (QCDs) are an alternative to traditional RMDs for those who don't need the RMD funds for themselves and don't want to be taxed on them. They're a better alternative to not taking RMDs because the IRS will charge you up to a 25% penalty for skipping them.
When you make a QCD, you still have to take the money out of your retirement account. But because you're donating to a charity, the withdrawal won't count toward your taxable income for the year.
In 2023, the maximum QCD was $100,000, but it's $105,000 for 2024. This number will continue to increase in future years as it's indexed to inflation. You'd need a massive amount of retirement savings to have an RMD of $100,000 or more, so this change probably won't make a difference to most people. But wealthy retirees will benefit from this increase.
To make a QCD, first identify the charity you want to give to. Make sure it's a tax-exempt organization according to the IRS. Otherwise, it won't count as a QCD.
Then, contact your retirement account provider and request that it send the funds to that charity. It must transfer the funds directly to count as a QCD. If it cuts you a check first and you donate to charity, you may be able to use that as a deduction on your tax return if you itemize, but it won't be a QCD.
Finally, make sure you get some sort of written acknowledgement from the charity listing the date and the amount of your donation. Contact the charity in advance of the donation to find out what you have to do to get this. You don't need to submit this acknowledgement to the IRS, but if it audits you, it could disallow the deduction without proof of the QCD, so you definitely want it on hand.
If you have any questions about your RMDs, reach out to a tax professional as soon as you can. There are only a few weeks left and you don't want to miss the Dec. 31 deadline, so get a plan in place quickly if you haven't taken your RMD for 2024 yet.
