3 Required Minimum Distribution (RMD) Rules Everyone Needs to Know Before the End of 2024

In just a few months, we’ll turn the calendar to 2025. Before we do, however, there are some important financial tasks to attend to. One of the biggest for many retirement account holders is the required minimum distribution, or RMD.

While you get a tax break when you contribute to a tax-deferred retirement account like an IRA or 401(k), Uncle Sam eventually wants the cut. That’s why the IRS imposes RMDs once the original account holder reaches a certain age. Currently, RMDs begin in the year you turn 73. You must start withdrawing your savings from the account at that age and pay taxes on those withdrawals.

Not knowing all the required minimum distribution rules could result in some severe penalties. Failure to make a required minimum distribution on time can result in a penalty of up to 25% of the amount you were supposed to withdraw. You’ll also still have to make the withdrawal and pay the income taxes owed anyway, so it’s worth making sure you take your required minimum distributions on time, which is usually before the end of the year.

The rules change, and recent legislation has added some confusion to exactly what the rules are and how they apply. Here are three RMD rules everyone needs to know before the end of 2024.

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1. You have three additional months (or more) to take your first RMD

As mentioned, RMDs currently start in the year you turn 73. However, there is a special rule for the first year you took them. You can postpone distribution until April 1 of the following year. So 1,951 baby boomers have until April 1, 2025 to make their first withdrawal from an IRA or 401(k). The RMD amount is still based on your retirement account balances at the end of 2023.

Each RMD after your first is due by December 31st. This means you will have to take two distributions in a single year if you choose to defer the first. This could result in a significant tax burden for some retirees. It may not make sense to avoid taxes this year only to pay even more taxes next year.

If you’re still working at age 73, you may be able to delay your RMDs even longer. You don’t have to take RMDs from a defined contribution plan like a 401(k) until after you retire (if your plan allows it). Importantly, the rule only applies to the current employer’s retirement plan. But this plan can let you roll over your old 401(k) or even IRA, avoiding RMDs altogether. The first RMD from the plan is due the year after you retire, instead of the year after you turn 73.

2. You may not have to take an RMD on an inherited IRA this year

The Secure Act changed the rules for inherited IRAs starting in 2020. The new rules apply to anyone who inherits an IRA from someone who died after December 31, 2019.

Instead of being able to extend withdrawals from an inherited IRA throughout their lifetime, beneficiaries now only have 10 years to empty the newly inherited account. There are exceptions for spouses, minor children, beneficiaries less than 10 years younger than the IRA owner, and disabled or chronically ill beneficiaries.

With the new rule, however, it was unclear whether someone inheriting an IRA after 2019 had to continue taking annual RMDs if the original owner had already begun doing so. After all, anyway, the government would get its tax money back within 10 years when the account was completely depleted. The IRS has waived the RMD requirement for 2020 through 2024.

The IRS recently decided that it will begin applying the RMD to inherited IRAs starting in 2025, and annual distributions must continue in cases where the original owner previously began taking them. Importantly, the 10-year rule still applies retroactively when the account has been inherited.

Even if you’re not subject to an inherited IRA RMD in 2024, it might make sense to withdraw some from the account now and pay taxes. The more years you spread your withdrawals out, the more manageable your tax bill could be. If you had to withdraw the entire amount in one year, it could result in a much higher tax than you would have paid by spreading the distributions over several years.

3. You can reduce your RMD by up to $105,000

If you have a large balance in your IRA, you may face a substantial RMD. If you’re charitable, one of the best ways to give away your money while reducing the tax burden on your RMD is to use a qualified charitable distribution, or QCD.

A QCD allows you to distribute funds directly from your IRA to a charity. That distribution will count toward your RMD, but you don’t have to wait until age 73 to take advantage of a QCD. They are available to anyone age 70 1/2 or older.

The advantages of using a QCD over a standard charitable donation can be quite significant. First, it effectively moves what would be an itemized tax deduction above the line. In other words, you can avoid taxes on your IRA distribution and still take the standard deduction.

Additionally, a QCD will not be added to adjusted gross income. This can play a big role in how Social Security income and capital gains are taxed and how much you pay in Medicare premiums.

You don’t have to donate tens of thousands of dollars to take advantage of QCD. Even if you only want to donate a portion of what your RMD would be, it can be a great option for retirees to save on taxes.