As the end of 2024 approaches, those who turned 73 this year must be aware of the required minimum distributions (RMDs) from their retirement accounts. RMDs are mandatory withdrawals that the IRS requires to tax savings in these accounts. The deadline for taking 2024 RMDs is December 31, with some exceptions.
If you haven’t taken your RMDs yet, it’s important to act quickly and avoid these four costly mistakes. First, not taking your full RMD can result in a 25% penalty on the amount you were required to withdraw but didn’t. This penalty may be reduced to 10% if corrected within two years.
Second, while IRAs allow you to take your total RMD from one account, 401(k)s require you to take RMDs from each account individually. Failing to do so can lead to penalties. Third, it’s crucial to understand that Roth IRAs and Roth 401(k)s are exempt from RMDs.
Since these accounts are funded with after-tax dollars and withdrawals are typically tax-free, the IRS does not require withdrawals. Lastly, instead of donating RMDs to charity, consider making a qualified charitable distribution (QCD). A QCD involves a direct transfer from your retirement account to a qualifying charity, exempting the amount from taxes and penalties.
Unlike a standard donation, a QCD does not raise your adjusted gross income and is available even if you take the standard deduction. If you have questions about how RMDs might affect your 2024 taxes, consult a tax professional. Remember to complete your RMDs or QCDs before the year-end to avoid penalties and tax issues.
RMD penalties and how to avoid
Ed Slott, president and founder of Ed Slott and Company, recently provided advice on navigating RMDs from various retirement accounts. He explained that with IRAs, the tax law treats them as one entity, allowing you to take the total distribution from any combination of your IRAs.
However, 401(k)s require you to take RMDs separately from each account. Slott also highlighted a common error involving spousal IRAs. Each spouse must satisfy their own RMDs separately to avoid penalties, as IRAs stand for Individual Retirement Accounts.
Under the Secure 2.0 Act, penalties for missed RMDs have been reduced from 50% to 25%, or even 10% if corrected within two years. The IRS may be lenient in waiving these penalties for reasonable causes, given the complexities seniors face. As the RMD deadline approaches, it’s essential to act promptly to avoid penalties.
Some custodians may not guarantee processing your RMD past a certain date. If you’re planning a Roth conversion, you must take your RMD first and consider using it to cover taxes from the conversion. If your RMD exceeds your living expenses, reinvest the surplus in a taxable brokerage account to keep your money working for you.
Special RMD rules may apply to inherited retirement accounts, such as the 10-year distribution requirement for non-spouse beneficiaries. To mitigate the tax implications of RMDs, consider strategies such as qualified charitable distributions, strategic withdrawals, tax diversification, and leveraging employer plans. Review your RMD strategy annually and consider consulting a Certified Financial Planner for personalized advice.
Consistent financial planning and awareness of RMD rules are essential for minimizing tax burdens and maximizing retirement income. Stay informed and proactive to make the most of your financial strategies.
Johannah Lopez is a versatile professional who seamlessly navigates two worlds. By day, she excels as a SaaS freelance writer, crafting informative and persuasive content for tech companies. By night, she showcases her vibrant personality and customer service skills as a part-time bartender. Johannah's ability to blend her writing expertise with her social finesse makes her a well-rounded and engaging storyteller in any setting.
