New RMD Rules for 2024: What You Need to Know for Retirement Accounts

Retirement accounts like 401(k)s and IRAs are appealing primarily due to their tax benefits. They allow contributors to postpone tax payments until retirement, enabling greater savings potential. However, these tax deferrals come with requirements that must be met.

To ensure it eventually collects taxes, the government mandates required minimum distributions (RMDs) from these accounts. Starting at age 73, seniors must begin taking withdrawals from their accounts, and individuals inheriting IRAs may also face RMD requirements.

The penalties for not following RMD rules can be severe. Missing an RMD can lead to a penalty of up to 25% for the amount not withdrawn, which must still be taken and taxed as income. On the other hand, withdrawing too much can negatively affect retirement plans by creating a higher tax burden.

Many find it challenging to keep up with frequent changes in RMD rules. Recent legislation has implemented several significant adjustments to these requirements. Below, we discuss three key updates for RMDs effective in 2024.

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1. Exciting News: Roth 401(k)s No Longer Require RMDs

For those who chose a Roth 401(k) over a traditional 401(k), there is good news: RMDs are no longer necessary for Roth accounts within 401(k)s. This change is part of the Secure 2.0 Act, effective from 2024, aligning Roth 401(k) accounts with the existing Roth IRA rules, which have never required RMDs.

Previously, Roth 401(k) holders had to transfer their funds to a Roth IRA to avoid RMDs. This was not always convenient. Furthermore, if someone did not have a Roth IRA before, they faced the five-year rule which mandates five years of establishing the account before tax-free earnings could be withdrawn.

2. Increase in IRA RMD Reduction: Up to $105,000

If you are inclined to donate to charity, new RMD rules let you decrease your IRA’s RMD amount. Starting in 2024, you can make a qualified charitable distribution (QCD) directly from your IRA up to $105,000, an increase of $5,000 from previous limits.

It’s important to remember that QCDs apply only to IRAs, not other retirement accounts. The $105,000 limit is per individual, so couples with separate sizable IRAs can donate up to $210,000, thus reducing their RMDs effectively.

Utilizing a QCD is a clever strategy for charitable giving, even if you do not reach the $105,000 cap. Donations made this way do not count as taxable income, benefiting you with a potential income tax deduction and allowing for the claim of the standard deduction. Additionally, a lower adjusted gross income (AGI) can minimize taxes on Social Security and long-term capital gains, and may lead to reduced Medicare Part B premiums.

3. Easier RMD Requirements for Older IRA Beneficiaries

If you inherited an IRA from someone younger who was already taking RMDs, you previously had to withdraw funds based on your life expectancy, which typically resulted in larger distributions. Fortunately, a new IRS ruling in 2024 now allows you to calculate the RMDs based on the original owner’s age, simplifying the withdrawal amounts for older heirs.

Additionally, older beneficiaries are not required to abide by the new 10-year depletion rule that applies to younger beneficiaries, thus allowing them to take RMDs annually while keeping the remaining balance in the account to grow over time. This could ultimately lead to passing on a significant IRA to future heirs.

Overall, these new regulations provide enhanced flexibility and ease for older beneficiaries regarding inherited IRAs and their required distributions.

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