3 new required minimum distribution (RMD) rules retirees need to know in 2024

One of the biggest advantages of saving for retirement in an account like an IRA or 401(k) is the ability to defer taxes. Instead of paying a large tax bill up front, you can delay paying your taxes until retirement. This will give you more money to invest today.

But eventually the government will ask for tax revenue. This is why we impose a required minimum distribution. Seniors must begin withdrawing funds from their retirement accounts and pay taxes on the withdrawals.

If you don’t know all the rules for the required minimum distribution, you can face stiff penalties. If you fail to make required minimum distributions on time, you may be subject to a penalty of 25% of the amount you choose to withdraw. Plus, you still have to make withdrawals and pay regular income taxes.

Additionally, recent legislation has brought about many changes to RMD rules. Here are three new rules retirees need to know in 2024:

Image source: Getty Images.

1. The required minimum deployment starts at 73, but you can choose to delay your first deployment.

Under the SECURE Act 2.0, the new required minimum distribution age is 73. This applied to people turning 73 in 2023 (born in 1950).

The government will actually provide an additional three months for the first deployment. The deadline for your first withdrawal is April 1 of the year after you turn 73. However, the second withdrawal must be made by December 31 of that year.

If you make at least two withdrawals in the same year, your tax bill can be huge. Be sure to take this into consideration if you plan to postpone your first RMD until after you turn 73.

But there are exceptions. You don’t have to take RMDs from a defined contribution plan, such as a 401(k), until after you retire (if your plan allows it). This only applies to your current employer’s 401(k) plan. Your first RMD must be paid the year after you retire, not the year after you turn 73.

2. Required minimum distributions no longer apply to Roth 401(k)s.

If you choose to save in your employer’s Roth 401(k) instead of a traditional tax-deferred account, your account is exempt from RMD rules. The rule takes effect in early 2024 and makes Roth 401(k)s equivalent to Roth IRAs, which do not require minimum distributions.

In the past, you could avoid RMDs in your Roth 401(k) by rolling over funds to a Roth IRA. However, during this process, investors may lose access to certain investment options that they liked in their previous plans.

Additionally, rolling over a Roth 401(k) to a Roth IRA can be problematic for retirees who have never opened a Roth IRA before. Roth IRAs are subject to a five-year rule that prevents you from withdrawing investment earnings within five years of opening the account. This could ultimately result in retirees having less access to their retirement savings than they need.

The new rules address this issue and make the Roth 401(k) equivalent to the Roth IRA.

3. You can now lower your RMDs by up to $105,000 per year through charitable contributions.

If you have more money in your retirement accounts than you need for your retirement spending plan, you may be looking for ways to avoid RMDs. If you are forced to withdraw funds in excess of your spending needs, you will be subject to hefty taxes. The good news is that you can avoid those taxes by making special distributions called qualified charitable distributions.

If you distribute funds directly from your IRA to a qualified non-profit organization, this counts toward required minimum distributions. This rule only applies to IRAs. Defined contribution plans, such as 401(k)s, do not receive the same treatment. In 2024, you can distribute up to $105,000 from your IRA to charity (up from $100,000 previously). This is an individual limit, so a married couple can distribute up to $210,000.

Distributing funds directly from an IRA to a charity has several great advantages. Distributions do not affect your gross income. This effectively takes an itemized tax deduction (charitable contributions) and makes it a top-tier deduction. This lowers your taxes on your Social Security income, lowers your Medicare premiums, and allows you to choose the standard deduction instead of itemized deductions, which can lower your tax bill even further.

You can begin making qualified charitable contributions as early as age 70 1/2, well before RMDs begin. This can be a great tool for philanthropic retirees who still have large IRA balances. Even if you donate much less than the new limit of $105,000, it can be a great way to reduce your taxes.