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    • Make sure you know these new required minimum distribution (RMD) rules
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    Make sure you know these new required minimum distribution (RMD) rules

    Umito Posted on

    Knowing these important rules could save you a lot of taxes and fees.

    Adam Levy
    | The motley fool

    One of the biggest benefits of saving in traditional retirement accounts like a 401(k) Or IRA is the initial tax relief you receive. You won’t owe any income tax on contributions in the year you make them. This can give you more money now, allowing you to save more for retirement.

    But you can’t defer those income taxes forever. Finally, Uncle Sam wants his share. This is why the IRS requires required minimum distributionsor RMD. As the name suggests, account holders subject to RMDs are required to withdraw a certain amount of money from their accounts. RMDs apply to anyone age 73 or older and can also apply to inherited IRAs, regardless of the account holder’s age.

    See: What if you could choose how to use your 401(k) match? One company is trying this.

    The penalty for missing an RMD can be quite steep – up to 25% of the amount you were supposed to withdraw – and you’ll still have to make the distribution and pay income taxes on top of that. So, you don’t want to miss filing an RMD on time (usually by December 31 each year).

    Unfortunately, the rules are constantly changing, so it’s essential to make sure you follow the most recent rule changes to ensure you don’t have to pay a hefty penalty to Uncle Sam. Here are three recently updated RMD rules that everyone needs to know before the end of 2024.

    Roth 401(k)s are now exempt from RMDs

    Just as important is taking your full RMD on time and avoiding unnecessarily withdrawing funds from a tax-protected account. This is why every retiree should know that Roth 401(k)s are now exempt from RMDs following the adoption of the Secure 2.0 law.

    Avoiding RMDs in a Roth 401(k) Previously Required transfer funds from a Roth 401(k) to a Roth IRA, which has no required minimum distributions. However, this process could result in investors losing access to some investment options they enjoyed in their 401(k).

    An additional challenge might arise for anyone who has never opened a Roth IRA before. Opening a new Roth IRA and transferring funds into it makes them subject to the five year rule. All earnings from your investments are locked in for five years from the year you open your first Roth IRA if you want to avoid taxes and penalties. As a result, retirees could find themselves with less access to their retirement savings.

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    The new rule solves this puzzle, putting the Roth 401(k) on equal footing with the Roth IRA.

    Inherited IRA owners may not have to take distributions this year

    The Secure Act brought big changes to Inherited IRAs. Instead of being able to stretch withdrawals throughout your life, called a stretch IRA, most beneficiaries now must distribute the entire account within 10 years of inheritance. If the original account holder was already subject to required minimum distributions, the beneficiary must also continue to take annual RMDs.

    If you inherited an IRA before December 31, 2019, you can still run the Stretch IRA. You will need to make a minimum required distribution this year accordingly.

    The new rule applies to anyone who inherited an IRA from someone who died after December 31, 2019. There are exceptions for spouses, children under 21, individuals with disabilities, and beneficiaries under 10 years younger than the original owner. .

    More: IRS increases 401(k) contribution limits, adds super catch-up for ages 60-63 in 2025

    Due to some confusion over the rule changes as written in the Secure Act, the IRS waived the RMD requirement for new beneficiaries from 2021 to 2024 (the Cares Act waived the RMD for everyone in 2020). So, if you inherited an IRA from someone after December 31, 2019, you are not required to take a distribution this year, even if the original owner was subject to RMDs.

    However, beneficiaries will have to start taking RMDs in 2025, according to a ruling released by the IRS this year. They will also have to distribute the entire account within 10 years of inheriting. As such, it might make sense to take a distribution this year anyway, unless you expect your personal income (and tax rate) to drop before the 10-year deadline expires. years.

    Reduce your RMD by up to $105,000 with a charitable distribution

    One of the best ways for retirees to donate to nonprofit organizations is through a qualified charitable distribution, or QCD. A QCD allows you to make a distribution directly from an IRA to a qualified nonprofit, and the good news is that a QCD counts toward your RMD. The IRS increased the QCD limit in 2024 to $105,000, up from $100,000.

    Note that this rule only applies to IRAs. Any savings in a defined contribution plan like a 401(k) are always subject to RMDs. And you can’t take a distribution from an IRA and have it count toward the RMD requirements for your 401(k).

    Distributing funds directly from your IRA to charity offers a big financial benefit. The distribution never appears as gross income like a regular distribution would. Although you can make a distribution and then donate to charity for the tax deductionyou will need to itemize your deductions to receive the tax break.

    A QCD allows you to make a donation to charity and benefit from the standard deduction without missing out on tax benefits. This can result in lower income taxes, a reduction in the percentage of Social Security income subject to tax, and a reduction in your Medicare premiums.

    You can begin taking qualified charitable distributions at age 70½, well before RMDs begin. Even if you give less than the $105,000 limit, they can be a great way for charities inclined to reduce their RMDs and keep their taxes low.

    The Motley Fool has a disclosure policy.

    The Motley Fool is a content partner of USA TODAY providing financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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