Most of us will spend decades stashing money in tax-advantaged accounts, like 401(k)s and individual retirement accounts (IRAs), to build a nest egg that can sustain us in retirement. But eventually, you'll need to tap those funds -- even if you don't need the money just yet -- thanks to something called required minimum distributions (RMDs), which ensure the IRS eventually gets a cut of those tax-advantaged dollars.
RMDs are mandatory withdrawals from retirement accounts that currently begin at age 73. However, the starting age is slated to increase to 75 in 2033 under the rules of the Secure Act 2.0, which passed in late 2022.
If you have modest savings, mandatory distributions may not be such a big deal because you're probably making withdrawals by the time you reach RMD age. But for those with substantial retirement assets, RMDs can result in a big tax bill.
The rules surrounding RMDs are complex and changed significantly under both the original SECURE Act (passed in 2019) and the Secure Act 2.0. Here are three new rules that took effect in 2024 that every retiree needs to know.
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1. RMDs are no longer required for any Roth account
Unlike traditional retirement accounts that are funded pre-tax and taxed upon withdrawal, Roth accounts don't offer an up-front tax break. Instead, you make your contributions with money that's already been taxed and then get potentially tax-free income in retirement.
But before 2024, only Roth IRAs were exempt from RMDs. You still had to take RMDs -- and pay the resulting tax bill -- for accounts including Roth 401(k)s and Roth 403(b)s, even though you'd already paid taxes on the money you contributed.
That all changed last year, though. For 2024 and subsequent tax years, Roth accounts are no longer subject to RMDs. You can let your money grow indefinitely in a Roth account for your entire lifetime, making them an effective tool for passing down wealth to heirs.
2. The penalties for not taking RMDs is reduced
Missed your RMD deadline? In the past, you were penalized by a jaw-dropping 50% of the amount you should have taken.
Fortunately, the Secure Act 2.0 softened the rules a bit. As of 2024, the penalty is reduced to 25% of the RMD. If you can show that you took quick action to correct your mistake, the penalty drops to 10%. Technically, this change took effect in 2023, but it applies to tax returns filed in 2024 and subsequent years.
3. More flexibility for spouses inheriting an IRA
RMDs can be especially tricky if you inherit an IRA, and the rules changed considerably under the original SECURE Act, which passed in 2019. But you generally have more options if you inherit an IRA or another type of retirement account from your spouse than you'd get as a non-spouse.
For example, if you're a surviving spouse, you can keep the inherited account in your deceased spouse's name and delay distributions until they would have reached RMD age. You can also or roll over the account into your own IRA and treat it as if you were the original owner -- meaning RMDs would be based on your age, not your late spouse's. Neither of these options are available to non-spouse beneficiaries.
None of that was new in 2024. But surviving spouses got some extra flexibility under new Secure Act 2.0 rules that took effect last year.
In a nutshell, RMDs for your own retirement account are usually calculated according to what's known as the IRS Uniform Lifetime Table (ULT). But if you inherit an IRA, you usually have to go by the IRS Single Life Expectancy Table (SLET), which calculates RMDs based on the beneficiary's life expectancy -- and usually results in larger RMDs.
Now, if you inherit an IRA from your spouse, you can opt to take RMDs using the ULT. That can translate to smaller RMDs and, hence, a smaller tax bill. (Note: This change only applies if your spouse died before reaching RMD age.)
Suppose you inherited a $500,000 retirement account from your spouse at age 73 and keep it in your spouse's name. Under the SLET, your first RMD would have been $30,488. But as of 2024, you can use the ULT, which would result in an RMD of just $18,868 -- allowing more of your money to continue growing on a tax-deferred basis.
Sound complicated? It sure is. That's why it's essential to consult with a knowledgeable tax attorney or CPA if you inherit a retirement account.
