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    • Make sure you know these new required minimum distribution (RMD) rules
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    Make sure you know these new required minimum distribution (RMD) rules

    Harry Posted on

    Knowing these important rules can save you a lot of money on taxes and fees.

    Adam Levy
    | Colorful Fool

    One of the biggest benefits of saving in traditional retirement accounts 401(k) or IRA It is the advance tax deduction you receive. You will not owe any income taxes in the year you contribute. This can save you extra money now and save more for retirement.

    But you can’t defer these income taxes forever. Finally Uncle Sam wants his share. That’s why the IRS imposes required minimum distributionsor RMDs. As the name suggests, account holders subject to RMD are required to withdraw a certain amount of money from their accounts. RMDs are available to anyone age 73 or older and may also apply to inherited IRAs, regardless of the age of the account holder.

    To see: What if you could choose how to use your 401(k) match? One company is trying this.

    The penalty for missing an RMD can be quite severe (up to 25% of the amount you should have withdrawn), and you’ll still have to take the distribution and pay income taxes on it. That’s why you don’t want to miss taking an RMD on time (usually by December 31 of each year).

    Unfortunately, rules are changing all the time, so making sure you’re up to date with the latest rule changes is crucial to ensuring you don’t end up owing Uncle Sam a huge fine. Here are three newly updated RMD rules everyone needs to know before the end of 2024.

    Roth 401(k)s are now exempt from RMDs

    Just as important as taking your full RMD on time is avoiding unnecessary withdrawals from a tax-sheltered account. That’s why every retiree needs to know this. Roth 401(k)s It is now exempt from RMDs following the passage of the Secure 2.0 Act.

    Avoiding RMDs in a former Roth 401(k), Rolling over funds from Roth 401(k) to a Roth IRA that does not have required minimum distributions. However, this process may result in investors losing access to certain investment options they enjoy in their 401(k).

    An additional challenge may arise for people who have never opened a Roth IRA before. Opening a new Roth IRA and transferring funds into it five year rule. If you want to avoid taxes and penalties, earnings on your investments are locked in for five years from the year you open your first Roth IRA. As a result, retirees may have less access to their retirement savings.

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    The new rule solves this headache by putting the Roth 401(k) on par with a Roth IRA.

    Inherited IRA owners may not have to take distributions this year

    The Security Act made some big changes inherited IRAs. Instead of extending withdrawals throughout your lifetime, called an extended IRA, most beneficiaries now have to distribute the entire account within 10 years of the inheritance. If the primary account owner is already subject to required minimum distributions, the beneficiary must also continue to take annual RMDs.

    If you inherited an IRA before December 31, 2019, you can still apply the stretch IRA. You will have to do something minimum required distribution As a result this year.

    The new rule applies to anyone who inherits an IRA from someone who died after December 31, 2019. There are exceptions for spouses, children under 21, disabled individuals, and beneficiaries under 10 years of age from the primary owner. .

    More: IRS raises 401(k) contribution limits and provides super catch for 60-63 year olds in 2025

    Due to some confusion regarding rule changes written into the Secure Act, the IRS waived the RMD requirement for new beneficiaries from 2021 through 2024 (The Cares Act waived RMD for everyone in 2020). So if you inherited an IRA from someone after December 31, 2019, you don’t have to take a distribution this year, even if the original owner was subject to RMDs.

    But beneficiaries will need to start taking RMDs in 2025, according to a decision issued by the IRS this year. They will also have to distribute the entire account within 10 years of taking over. So unless you expect a decline in your personal earnings (and your tax rate) before the 10-year period is up, it may still make sense to take a distribution this year.

    Reduce your RMD by up to $105,000 with a charitable distribution

    One of the best ways for retirees to donate to nonprofits is to use a qualified charitable distribution, or QCD. A QCD allows you to distribute directly from an IRA to a qualified nonprofit, and the good news is that a QCD is included in your RMD. The IRS increased the QCD limit to $105,000 in 2024, from $100,000 previously.

    Note that this rule only applies to IRAs. Savings in defined contribution plans such as a 401(k) are still subject to RMDs. And you can’t take a distribution from an IRA and have it count toward the RMD requirements for your 401(k).

    Distributing funds directly from your IRA to charity offers a huge financial advantage. The distribution never appears as gross income like a regular distribution. You can distribute and then donate to charity. tax deductionTo benefit from the tax deduction, you must itemize your deductions.

    QCD allows you to donate to charity and take advantage of the standard deduction without missing out on tax benefits. This can result in lower income taxes, reduce the percentage of Social Security income that is taxable, and reduce your Medicare premiums.

    You can begin making qualified charitable distributions at age 70 1/2, long before RMDs begin. Even if you donate less than the $105,000 limit, these donations can be a great way for charities to reduce their RMDs and keep their taxes low.

    The Motley Fool has a feature disclosure policy.

    The Motley Fool is a USA TODAY content partner providing financial news, analysis and commentary designed to help people take control of their financial lives. Content is produced independently of USA TODAY.

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    Harry
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