The Internal Revenue Service (IRS) is urging some U.S. residents to withdraw funds from their retirement accounts before the end of the year. This reminder is particularly important for those aged 73 and older who are required to take minimum distributions (RMDs) from their individual retirement arrangements (IRAs) and other retirement plans. The SECURE 2.0 Act, which recently came into effect, has raised the age for mandatory withdrawals from retirement accounts from 70-and-a-half to 73.
This age will further increase to 75 starting January 1, 2033. The act aims to give individuals more flexibility in managing their retirement funds and coordinating the use of Social Security benefits with distributions from their retirement plans and traditional IRAs. However, it is important to note that delaying RMDs may result in larger withdrawals in the future, as the funds in these accounts continue to grow.
Roth IRAs, on the other hand, do not require withdrawals during the account owner’s lifetime. Individuals with workplace retirement plans, such as 401(k)s, may defer taking RMDs until the year they retire, unless they hold at least a five percent ownership in the business sponsoring the plan.
Withdrawal rules for retirees clarified
Failure to withdraw the minimum required amount can result in a tax penalty of up to 25%, although this can be reduced to 10% if the RMD is corrected within two years. The amount of the RMD is determined by dividing the retirement account’s prior year-end fair market value by a life expectancy factor published by the IRS. Account owners have the flexibility to withdraw the total required amount from one or more of their accounts as long as the annual requirement is met.
Derek Williams, a certified financial planner from Veratis Advisors in Cary, North Carolina, warns that large pretax retirement accounts can become a “tax nightmare in retirement” when RMDs are due. Pretax RMDs boost your adjusted gross income, which can lead to higher Medicare Part B and Part D premiums, among other tax consequences. To reduce taxable income, individuals can use a Qualified Charitable Distribution (QCD).
A QCD is a transfer from an IRA to a qualified charity, and it counts against your RMD without being added to your taxable income. Michael Lofley of HBKS Wealth Advisors in Stuart, Florida, notes that this strategy can also help score a tax break for charitable gifts, even if you don’t itemize deductions on your tax return. For more detailed information about RMDs and retirement planning, visit the IRS website.
Noah Nguyen is a multi-talented developer who brings a unique perspective to his craft. Initially a creative writing professor, he turned to Dev work for the ability to work remotely. He now lives in Seattle, spending time hiking and drinking craft beer with his fiancee.
