As we approach the end of 2024, have you taken your required minimum distribution? This may be the first time you’ve heard that taxes are due on monies that you have not paid taxes on. If you’re like many that I talk with, you weren’t even aware that taxes would ever be do. You were told that this money was tax free.
It’s important to act promptly to avoid penalties. Some custodians will not guarantee that they can honor processing your RMD past a certain date. The penalty for a missed RMD used to be 50% of the amount not taken. SECURE 2.0 reduced this penalty to 25%, and down to 10% if the missed RMD is corrected in a timely fashion.
Understanding Required Minimum Distributions (RMDs) is essential for avoiding penalties and optimizing financial outcomes.
What Are RMDs?
RMDs are the minimum amounts you must withdraw annually from most retirement accounts after reaching a certain age. These accounts include:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) and 403(b) plans
Roth IRAs, however, do not require RMDs during the account holder’s lifetime.
The SECURE Act 2.0 adjusted the RMD age to 73 for those born between 1951 and 1959 and to 75 for those born in 1960 or later. Missing an RMD deadline can result in a penalty of 25% of the RMD amount, reduced to 10% if corrected promptly.
For further reading on RMD rules, visit the IRS.gov RMD FAQs.
2024 RMD Planning Considerations
If you are already in or approaching the RMD age, here are critical issues to review:
- First-Year Timing. You can delay your first RMD until April 1 of the year after reaching your RMD age. However, this could result in two RMDs in one year, potentially pushing you into a higher tax bracket. Your custodian may have already calculated and notified you of the required minimum distribution. If you have a spouse that is more than 10 years your senior, that amount should be lower. You’ll need to inform your custodian to recalculate the number for you.
- Withdrawals sufficing. If you are using the funds and withdrawing more than the RMD, you have already satisfied the RMD. If not, you will need to withdraw the difference and pay the taxes.
- Tax Withholding and Roth Conversions. If you’re planning a Roth conversion, you must take your RMD first. Consider using your RMD to cover taxes from the conversion, which can streamline your tax obligations.
- Reinvesting Surplus RMDs. If your RMD exceeds your living expenses, reinvest the surplus in a taxable brokerage account. This strategy keeps your money working for you instead of sitting idle.
- Inherited Accounts If you inherit a retirement account, you might need to follow special RMD rules, such as the 10-year distribution requirement for non-spouse beneficiaries. Learn more about these rules here.
Mitigating RMD Tax Implications
RMDs can push you into higher tax brackets and increase Medicare premiums. Here are strategies to mitigate these effects:
Qualified Charitable Distributions (QCDs)
If you’re 70½ or older, you can donate up to $105,000 annually to qualified charities directly from your IRA. This donation satisfies your RMD while reducing taxable income.
Strategic Withdrawals
If market conditions are favorable, consider taking RMDs earlier in the year to lock in gains. Conversely, delay withdrawals if markets are down to avoid selling assets at a loss.
Tax Diversification
Contribute to Roth accounts early in your career to reduce taxable RMDs in retirement. Roth accounts grow tax-free and have no RMDs, providing more flexibility.
Leveraging Employer Plans
Still working at 73 or older? If your employer plan allows, you might qualify for the “still-working” exception, enabling you to defer RMDs from that plan. This deferral does not apply to IRAs or former employer plans.
Real-Life Example
A reader recently reached out about a strategy I highlighted in a previous Forbes article on possible RMD optimization, using QCDs. They were nearing age 73 and had multiple accounts. By consolidating their IRAs, they reduced administrative burdens and used a QCD to support their favorite charity, minimizing their taxable income while fulfilling their RMD.
Final Thoughts
Required Minimum Distrubutions can feel like a financial burden, but with proper planning, they become an opportunity to optimize your financial future. Review your RMD strategy annually, and don’t hesitate to consult a Certified Financial Planner.
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