One of the biggest advantages of retirement accounts like the IRA and 401(k) is the ability to avoid paying taxes. Instead of paying taxes upfront, you can defer those taxes until retirement. Additionally, you won't pay any taxes on your earnings until you withdraw the funds from your account. Both can be a tremendous advantage in building a sizable retirement account.
But eventually, the government wants its tax revenue. That's why it imposes required minimum distributions, or RMDs, on accountholders once they reach a certain age. Anyone who turned 73 or older in 2024 is required to withdraw a certain amount from their retirement account(s) and pay income taxes on the amount. Those who inherited an IRA may also be subject to RMDs.
There are some stiff penalties for those who don't take their required distribution or simply make a mistake in calculating how much to withdraw. You could owe up to 25% of the amount you were supposed to withdraw. Plus, you'll still have to take the distribution and pay regular income taxes on the amount anyway.
To make matters worse, the required minimum distribution rules have undergone a lot of changes in recent years. In 2024 alone, there were five major rule changes you need to know about before the end of the year.
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1. Roth 401(k)s are no longer subject to RMDs
Unlike its IRA counterpart, the Roth 401(k) has long been subjected to RMDs.
Seniors could work around that challenge by rolling over the Roth 401(k) into a Roth IRA, but then they might find the earnings held in their account locked up due to the five-year rule. The five-year rule requires you to have established your Roth IRA for at least five years before you can withdraw the earnings from the account tax-free. That ultimately led to some retirees either being forced to withdraw more than they wanted from their Roth 401(k), or unable to withdraw as much as they wanted from their new Roth IRA.
That's no longer an issue in 2024. You can now keep your funds in your 401(k), and you won't have to take an RMD. That puts it on equal footing with the Roth IRA.
2. Inherited IRAs may be subject to RMDs
The Secure Act changed several rules on inherited IRAs when it passed in 2019, but the IRS finally made an official ruling on a major sticking point this year.
Most people (with a few special exceptions) who inherited an IRA since Dec. 31, 2019 from someone who was already subject to RMDs must continue making those RMDs. The good news is that the required distribution is waived for 2024, just as it was from 2020 through 2023. The IRS won't enforce the rule until 2025.
The bad news is that you must deplete the entire account within 10 years of inheriting it. So if you inherited an IRA in 2020, you still only have until 2030 to deplete the account. Since you need to withdraw all the funds relatively quickly, it may be beneficial from a tax standpoint to spread your withdrawals out over as many years as possible.
3. Older beneficiaries can take smaller RMDs
If you inherit an IRA from someone younger than you who was already taking RMDs, you still have to take RMDs from that account (as well as your own). The IRS released a ruling this year that you can base those RMDs on the original owner's life expectancy instead of your own, potentially reducing the amount you have to withdraw each year.
Additionally, older beneficiaries typically aren't subject to the 10-year rule noted above, so they don't have to worry about withdrawing more than the minimum each year. However, it may be worth considering who you'll pass the IRA on to if they're younger and what their RMD requirements will be.
4. You can reduce your RMD by up to $105,000
If you have a big IRA and you're charitably inclined, you can make a special distribution that counts toward your RMD but won't count toward your taxable income. It's called a qualified charitable distribution, or QCD.
Qualified charitable distributions only apply to IRAs, but you can take assets from your retirement account and send them directly to a qualified non-profit. For 2024, you can distribute up to $105,000 per person. That's up from $100,000 previously.
The QCD is a very efficient way to make charitable donations as a senior, since it allows you to effectively take the deduction for charitable contributions without itemizing. That lets you keep the standard deduction on your taxes.
5. Anyone born in 1959 will start taking RMDs at age 73
The Secure 2.0 Act increased the required minimum distribution age from 72 to 73 starting in 2023. Starting in 2033, the RMD age jumps to 75. But this creates a problem for anyone born in 1959.
1959 babies turn 73 in 2032, which means they'll be subject to RMDs that year. In 2033, they'll be 74, which would be below the RMD age listed in the Secure 2.0 Act. Congress said it will provide clarifying legislation to fix the conundrum, but the IRS issued a ruling this year stating that those born in 1959 will begin RMDs the year they turn 73 in 2032. Unless Congress acts before then, the IRS will enforce its ruling.
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