As the new year begins, retirees should evaluate their retirement savings in light of upcoming regulatory changes. Recent announcements confirm the required minimum amounts retirees need to withdraw from their retirement accounts. The Required Minimum Distributions (RMDs) are essential for those with IRA accounts or savings plans like 401(k)s.
The IRS mandates annual withdrawals from these funds to ensure taxes are paid on the money before it is spent. Starting at age 73, retirees must begin taking these withdrawals, regardless of their immediate financial need. For those with regular IRA accounts, SEP or SIMPLE IRA accounts, or retirement plans such as 401(k), Roth 401(k), 403(b), or 457(b), it is crucial to comply with these regulations.
However, if retirees are still employed and have an employer-sponsored retirement plan, they may delay their RMDs until retirement, unless they own more than 5% of the business. A significant update applies to Roth funds within 401(k) or 403(b) plans. Beginning in 2024, these accounts will no longer be subject to the RMD requirements, provided the account owner is still living.
Determining the correct withdrawal amount involves a specific calculation: the account balance at the end of the previous year divided by the account holder’s current life expectancy. Noncompliance with RMD rules can result in severe IRS penalties. Retirees uncertain about these requirements should seek advice from financial advisors or refer to IRS guidelines to avoid potential issues.
Many retirees already meet their RMDs through the routine withdrawals they make during the year.
New RMD guidelines for 2024
However, this isn’t the case for everyone.
Sometimes, you take your RMD just to avoid the penalty tax, but you don’t actually need the money right away. If you’ve just withdrawn your 2024 RMD, you can put that money toward your 2025 living expenses. Keep your funds in a short-term savings account or investment to help them grow until you need them.
Another option is to reinvest your RMD in a taxable brokerage account. Here, you’re free to invest your money however you like so it can continue to grow until you need it. You will owe taxes on your earnings when you sell your investments, but if you hold them for a year or more, you’ll pay long-term capital gains tax which has a lower rate than income tax.
If you truly have no need for the cash and don’t want your RMD to increase your taxes, a qualified charitable distribution (QCD) might be your best option. This is where you donate your RMD directly to a charity. The money must go directly from your account to the charity without ever passing through your hands.
If you opt for a QCD, the money still comes out of your account, but the IRS won’t count it when calculating your taxable income for the year. Retirees should stay informed about regulatory changes and seek professional advice to secure their financial future. Managing your RMDs carefully can help you minimize taxes and make the most of your retirement savings.
Consult your financial advisor to discuss your specific situation and develop a strategy that suits your financial goals.
