The Internal Revenue Service (IRS) requires individuals aged 73 and older to take required minimum distributions (RMDs) from their retirement accounts each year. These rules can be complex and change over time, making it important for retirees to stay informed. One key rule to know is that you have an extra three months or longer to take your first RMD.
While RMDs typically begin the year you turn 73, you can delay your first distribution until April 1 of the following year. However, this means you will have to take two distributions in a single year, which could result in a higher tax burden. Another important rule relates to inherited IRAs.
The SECURE Act changed the rules starting in 2020, requiring most beneficiaries to empty newly inherited accounts within 10 years. However, the IRS waived the RMD requirement for 2020 through 2024. Beginning in 2025, annual distributions must continue in cases where the original owner had already begun taking RMDs.
Key RMD rules and tax strategies
Lastly, retirees can reduce their RMD by up to $105,000 using a qualified charitable distribution (QCD). A QCD allows you to distribute funds directly from your IRA to a charitable organization, counting toward your RMD without increasing your taxable income.
This strategy can be particularly beneficial for those in higher tax brackets. Managing RMDs effectively is crucial to avoid penalties and optimize your overall financial plan. Consulting with a qualified financial advisor can help ensure you make informed decisions tailored to your specific situation.
Keeping track of year-end statements, exploring RMD-reduction strategies like QCDs, and strategically managing inherited IRA withdrawals are all important considerations. For federal employees with a Thrift Savings Plan (TSP), there are additional strategies to minimize RMDs. These include contributing to a Roth TSP or Roth IRA, performing Roth conversions, and utilizing QCDs for charitable giving.
By proactively managing your retirement accounts, you can reduce the potential tax burden associated with RMDs and maintain greater control over your financial future.
