Retirement account owners must take required minimum distributions from traditional IRAs and 401(k)s after a certain age. The SECURE 2.0 Act, signed into law in December 2022, brought changes to the RMD rules in 2023. For 2024, you’ll want to know what age your RMDs will start, along with the consequences for missing a withdrawal. You should also be familiar with the guidelines related to charitable giving and Roth 401(k) RMDs.
For RMD rules in 2024, consider the following:
— RMDs begin at age 73.
— RMDs could impact Medicare costs.
— RMDs might affect taxes.
— Missing a withdrawal may result in penalties.
— The qualified charitable distributions limit increased in 2023.
— There are no RMDs for Roth 401(k)s in 2024.
[READ: How to Take Required Minimum Distributions.]
RMDs Begin at Age 73
Prior to the SECURE 2.0 Act, the age to start RMDs was 72 for retirement accounts, including traditional IRAs and 401(k)s. The law brought changes to the RMD in two phases. First, the RMD age increased to 73 in 2023. In 2033, the RMD age will further rise to 75. Individuals born between 1951 and 1959 must start their RMDs after age 73. Those born in 1960 or later can delay RMDs until after age 75.
There are important deadlines for when individuals must begin retirement account withdrawals. You get extra time to take your first RMD, but subsequent RMDs must be taken each calendar year. If you’re turning 73 in 2024, you can take your first RMD by Dec. 31, 2024, or you could choose to wait until April 1, 2025. Waiting until April 1, 2025, means you’ll have to take a second RMD by Dec. 31, 2025.
“Since RMDs are calculated on the prior year’s account balance on Dec. 31, delaying an RMD until April 1 of the year after you turn 73 is not always optimal,” said Eric Johns, a certified financial planner and co-owner of Equilibrium Financial Planning in Kenner, Louisiana. “Doing so means you are now required to take two RMDs in the same year, and the calculated RMD will be slightly higher for year two.”
RMDs Could Impact Medicare Costs
The amount you pay in Medicare Part B and D premiums is related to your income. If you delay taking withdrawals until you turn 73, your income could be lower, and thus, your premiums could be less. Once you begin RMDs, your income could go up and you may have to pay more for Part B and D premiums.
[See: 12 Ways to Avoid the IRA Early Withdrawal Penalty.]
RMDs Might Affect Taxes
Taking retirement account distributions after turning 73 could lead to a higher income and larger tax bill.
“It could also result in a larger portion of pre-tax accounts passing to heirs, assuming one used less of their qualified account during their lifetime,” said David Edmisten, a certified financial planner and founder of Next Phase Financial Planning in Prescott, Arizona, in an email. This could potentially result in higher taxes for the account beneficiaries.
Missing a Withdrawal May Result in Penalties
Account holders who do not take an RMD at the correct time typically face penalties. Before the SECURE 2.0 Act, the tax penalty was 50% on the required amount not withdrawn. If an individual failed to take an RMD of $2,000, they would need to pay a 50% tax penalty, or $1,000. The SECURE 2.0 Act changed this penalty to 25%. In the case of a missed RMD of $2,000, that charge would be $500. If the error is corrected within two years, your penalty drops to 10%. In some cases, if the missed RMD was due to a mistake and you can demonstrate that reasonable steps are being taken to resolve the issue, the IRS may waive the penalty.
“It’s very important to stay on top of RMDs to avoid what is still a significant penalty,” said Dennis De Kok, certified financial planner and owner of FCM Financial Planning in Grand Rapids, Michigan, in an email. To help you avoid incurring penalties, talk to your financial advisor about setting up automatic withdrawals or simply set a reminder on your calendar ahead of important RMD deadlines.
[See: 10 Tax Breaks for People Over 50.]
The Qualified Charitable Distributions Limit Increased in 2023
As of 2024, account holders aged 70 1/2 and older can make IRA-qualified charitable distributions of up to $105,000 each year without owing income tax on the transaction, which can also count as your RMD for that year. The qualified charitable distribution limit increased from $100,000 in 2023 and is linked to inflation.
As of 2024, account holders may give a one-time gift of up to $53,000 directly to an eligible entity through a charitable gift annuity, charitable remainder unitrust or charitable remainder annuity trust. This is an increase from $50,000 in 2023.
A qualified charitable distribution can be used to satisfy part or all of your IRA minimum distribution requirements. “If you are planning to limit your distributions to the RMD amount, you will need to make sure part of that required minimum distribution is going directly to a qualified charity,” De Kok said. “This effectively lowers your taxable income by the qualified charitable distribution amount.”
There Are No RMDs for Roth 401(k)s in 2024
Based on the SECURE 2.0 Act, Roth 401(k) account holders no longer have to take RMDs. This rule takes effect in 2024, so you must still take RMDs from designated Roth accounts for 2023. The change aligns Roth 401(k)s with Roth IRAs, which also do not require distributions in retirement. Prior to the change, retirees with a Roth 401(k) would need to roll the account into a Roth IRA to skip the RMDs. Now that additional step is not necessary.
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Don’t Overlook These New RMD Rules for 2024 originally appeared on usnews.com
Update 01/26/24: This story was published at an earlier date and has been updated with new information.
