One thing that makes retirement accounts like a 401(k) or IRA extremely attractive is the tax advantages they offer. Instead of paying taxes upfront, you can defer those taxes well into retirement. That can give more people more money to save for retirement today.
But you can't defer those taxes forever. Eventually, the government wants its tax revenue. That's why it imposes required minimum distributions, or RMDs, on accounts like the 401(k) and IRA. Seniors must start withdrawing funds from their accounts beginning the year they turn 73, and those inheriting IRAs may be subject to RMDs as well.
The penalties for messing up an RMD can be stiff, so it's important to know all the rules. Failing to take an RMD could result in a penalty as high as 25% of the amount you were meant to withdraw. Plus, you'll still have to take the distribution and pay the income taxes on it. Withdrawing more than you need to can be nearly as damaging to your retirement plans, as you'll end up paying more in taxes than you had to if you knew the rules.
The biggest challenge for many people is that the rules are always changing. Several pieces of legislation affecting RMDs went into effect in recent years, and the IRS is still providing clarifying rulings. Here are three important RMD rule changes from 2024.
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1. Required minimum distributions no longer apply to Roth 401(k)s
If you decided to save in a Roth 401(k) instead of your employer's tax-deferred 401(k) option, you can breathe easy. You don't have to take an RMD from Roth accounts in your 401(k) anymore.
The new rule is part of the Secure 2.0 Act from 2022, but it didn't go into effect until 2024. It effectively puts Roth 401(k) accounts on par with their IRA counterparts. Roth IRAs have never been subject to RMDs.
Roth 401(k) owners used to have to roll over their account to a Roth IRA in order to avoid RMDs. This presents a few challenges. First, a person might prefer their 401(k) over an IRA. Second, if a person never owned a Roth IRA before, they'd be subject to the five-year rule. That requires them to have established a Roth IRA for five years before withdrawing any of the earnings from the account without taxes or penalties.
2. You can reduce your IRA's RMD by up to $105,000
If you're charitably inclined, you can reduce your RMD by donating directly from your IRA to a qualified nonprofit. Starting in 2024, you can make a qualified charitable distribution, or QCD, from your IRA up to $105,000. That's a $5,000 increase from the previous limit.
There are a few important things to keep in mind when it comes to QCDs. First, they only apply to IRAs. You can't use them to distribute funds held in other types of retirement accounts. Second, since IRAs are held by individuals, the limits also apply to individuals. That means if your spouse also has a sizable IRA, you can contribute up to $210,000 as a couple, all while reducing your RMDs.
The QCD is a smart way to give to charity, even if you aren't going to max out the $105,000 limit. That's because the amount distributed from your IRA doesn't affect your adjusted gross income (AGI). In effect, you get the income tax deduction for the contribution because the amount you donate never even counts as income. But that also leaves you open to taking the standard deduction on your tax return. Keeping your AGI low can also reduce taxes on Social Security and long-term capital gains, and it can help you qualify for lower Medicare Part B premiums.
3. Older IRA inheritors can take smaller RMDs
If you inherited an IRA from someone younger than you who was already taking RMDs when they passed, you were previously required to deplete the account based on your own life expectancy. That results in a bigger RMD because an older beneficiary's life expectancy is shorter than the younger original owner's was.
However, the IRS made a ruling in 2024 that says you can now deplete the account based on the original owner's age. That can reduce the burden of inherited IRA RMDs on someone who's already taking RMDs themselves.
Additionally, since you're older than the original owner, you won't be subject to the new 10-year rule, which requires a beneficiary to deplete an inherited IRA within 10 years of the original owner's death if the person died in or after 2020. As such, you can take RMDs every year and leave the rest of the balance in the account to compound indefinitely. You could, however, end up passing a sizable IRA on to your heirs, at which point it might then become subject to the 10-year rule.
Nonetheless, the new ruling gives older beneficiaries much more leeway in determining when to take distributions from certain inherited IRAs, and how much to take.
