2024 Changes to Required Minimum Distributions (RMDs) – Impact on Retirees

By Ehsteem Arif

Published on:

Joe Biden

If you’ve been diligently saving for retirement, your accounts are likely in good shape. However, your work isn’t done just because you’re retiring. Now, your new job is to know how everything works to avoid financial pitfalls, especially the requirements surrounding required minimum distributions (RMDs). Mistakes with RMDs can lead to fines and penalties that deplete your accounts faster than anticipated.

RMDs

A required minimum distribution is the minimum amount you must withdraw from your retirement accounts each year. The Secure 2.0 Act recently increased the RMD age from 72 to 73, meaning RMDs will now be notably larger. This change is due to record stock market gains and the growing number of retirees now required to take RMDs.

Advertisement

Fidelity Investments projects its total RMDs will reach an unprecedented $25 billion this year. Rita Assaf, Fidelity’s vice-president of retirement products, noted, “Due to the market high on Dec. 31, 2023, as well as having more clients who are now eligible, we anticipate RMDs in 2024 to be the largest ever.”

For those turning 73 this year or planning ahead, here are four critical facts about RMDs to keep in mind.

Advertisement

Taxation of RMDs

RMDs are treated as ordinary income, subject to standard federal and state income tax rates. This increase in your adjusted gross income (AGI) can push you into a higher tax bracket, result in higher Medicare premiums, and potentially lead to the taxation of Social Security benefits. Planning ahead and setting aside money for these taxes is crucial, especially in the first year of taking RMDs.

Penalties for Not Taking RMDs

Skipping RMDs is not a viable option to avoid taxes. Failing to withdraw the required amount or missing the deadline incurs a hefty penalty of 25% on the amount you were supposed to withdraw. You’ll still need to withdraw it and pay taxes on it, on top of the fine. However, if you correct the mistake within two years, the IRS may reduce this penalty to 10%.

Advertisement

Inevitability of RMDs

Once you reach 73, you must take RMDs by December 31 each year. While you can’t avoid RMDs, you can put the withdrawn money in a high-yield savings account to earn interest or reinvest it in other assets. Donating to charity is also an option some retirees choose to offset taxes, providing a rewarding way to use the money if you don’t need it.

Roth IRA Exemption from RMDs

Roth IRAs are exempt from RMDs since contributions are taxed upfront. Additionally, investment gains within a Roth IRA are tax-free if you are at least 59½ years old and have owned the account for at least five years. The only time RMDs apply to a Roth IRA is if the account is inherited.

Advertisement

Special Considerations

If you are still employed at age 73 and participate in an employer-sponsored retirement plan, you are not required to take RMDs from that plan. However, this exemption does not apply to retirement plans from previous employers. There is an exception: if your current employer’s plan mandates distributions at RMD age or if you own more than 5% of the business where you work, you will need to take RMDs.

Knowing and managing RMDs is crucial for maintaining your retirement savings and avoiding unnecessary penalties. By staying informed and planning ahead, you can navigate this aspect of retirement with confidence.

Advertisement

FAQs

What is an RMD?

An RMD is the minimum amount you must withdraw from your retirement accounts each year.

When must I start taking RMDs?

You must start taking RMDs at age 73.

Advertisement

How are RMDs taxed?

RMDs are taxed as ordinary income.

What happens if I don’t take an RMD?

You may incur a penalty of 25% on the amount not withdrawn, reducible to 10% if corrected within two years.

Advertisement

Are Roth IRAs subject to RMDs?

No, Roth IRAs are exempt from RMDs unless inherited.

Advertisement

Disclaimer- We are committed to fair and transparent journalism. Our Journalists verify all details before publishing any news. For any issues with our content, please contact us via email. 

Ehsteem Arif

A tax law expert with a knack for breaking down complex regulations into digestible insights. Ehsteem's articles on the tax news blog offer invaluable guidance to readers navigating changes in tax legislation.

Recommend For You