If you’re close to retirement or have already retired, there are new rules regarding your required minimum distributions (RMDs) that could impact your finances. RMDs are the minimum amounts you must withdraw from your retirement accounts each year.
This year, these rules have changed due to new legislation. In this article, we’ll break down what RMDs are, the new changes affecting them, and how you can manage them to maximize your retirement savings.
What Are Required Minimum Distributions (RMDs)?
RMD Basics
RMDs are the minimum amounts retirees must withdraw from their traditional IRAs, 401(k)s, and similar retirement accounts every year. The SECURE 2.0 Act has increased the age for mandatory withdrawals from 72 to 73.
This means you now have a little more time before you must start taking money out of your accounts.
Roth 401(k) and Roth IRA
Roth 401(k)s are becoming popular in retirement plans because they allow after-tax contributions, meaning the money grows tax-free and is withdrawn tax-free during retirement.
Unlike traditional 401(k)s, Roth 401(k)s don’t give you a tax break upfront but offer long-term benefits. Thanks to new rules, Roth 401(k)s no longer have RMDs, making them an attractive option for retirees.
New Changes Affecting RMDs
1. No RMDs for Roth 401(k) Accounts
One of the most significant changes is that Roth 401(k)s no longer require RMDs. This allows you to keep your money in the account, growing tax-free for as long as you want.
However, if you plan to convert a Roth 401(k) into a Roth IRA, remember the five-year rule to avoid taxes on withdrawals.
2. Options for Inherited IRAs
If you inherit an IRA, the SECURE 2.0 Act requires that you must deplete the account within 10 years. However, from 2020 to 2024, there’s temporary relief from RMDs for inherited IRAs, allowing you to delay withdrawals and possibly reduce your tax burden.
3. Qualified Charitable Contributions (QCDs)
If you have a large IRA balance, you can use QCDs to reduce your RMDs. QCDs let you donate up to $105,000 directly from your IRA to a charity, and that donation counts toward your RMD.
If you’re married, you and your spouse can donate up to $210,000, doubling the benefit and potentially reducing your taxes.
Ways to Manage Your RMDs
Avoiding RMDs
One way to avoid RMDs on inherited IRAs is through careful planning. The IRS gives a grace period until 2024, allowing you to defer withdrawals. With proper planning, you can spread out your withdrawals and reduce your tax burden.
Using QCDs to Reduce RMDs
Qualified Charitable Contributions are an effective way to lower your RMDs while supporting a cause you care about. By donating directly from your IRA, you meet your RMD requirements and get tax advantages.
This strategy is helpful for retirees who don’t need their full RMDs for personal expenses.
Managing your RMDs is crucial to making the most of your retirement savings. The new changes, especially regarding Roth 401(k)s and QCDs, offer opportunities to reduce your tax burden and grow your savings.
Stay informed, plan ahead, and use strategies like QCDs to manage your RMDs effectively. By understanding the latest rules, you can secure a more comfortable and tax-efficient retirement.
1. What are RMDs?
RMDs are the minimum amounts you must withdraw annually from certain retirement accounts, such as IRAs and 401(k)s.
2. When do I have to start taking RMDs?
The SECURE 2.0 Act raised the RMD age from 72 to 73, giving retirees more time before they must start taking withdrawals.
3. Do Roth 401(k)s require RMDs?
No, Roth 401(k)s no longer require RMDs, allowing your money to grow tax-free indefinitely.
4. How do QCDs help reduce RMDs?
By donating directly from your IRA to a charity through a QCD, you can reduce your taxable income and meet your RMD requirements.
5. What happens if I inherit an IRA?
If you inherit an IRA, you must empty the account within 10 years. However, there’s a temporary relief from RMDs until 2024.
