7 Essential Things to Know Before Taking Minimum Required IRA Distributions in 2024

24/7 Wall St. Key Takeaways:

• Starting in 2024, individuals must take RMDs at age 73, with updated life expectancy tables leading to lower potential withdrawal amounts.
• RMDs are taxed as ordinary income, so it’s important to consider them as part of your overall tax strategy. To minimize your tax liability, we recommend that you consider strategies such as Roth conversions or charitable giving.
• RMDs can also impact your estate planning, even if you don’t necessarily plan to leave your retirement accounts behind. It’s important to work with a professional to figure out how the new rules may affect your estate plans.

Taking required minimum distributions (RMDs) from your IRA is an integral part of retirement planning, and the rules seem to be changing all the time! With ever-changing life expectancy tables and potential tax penalties, it’s important to stay informed.

In this to-the-point guide, we’ll quickly go over some of the essential information you need to know about RMDs.

1. What are RMDs and who needs to take them?

RMDs are withdrawals you must take from your IRA account.

RMDs are mandatory withdrawals that some retirement account holders must begin making once they reach a certain age. In 2024, that “certain age” is 73 years old. So once you turn 73, you need to start taking a certain amount of money out of your retirement accounts. This applies all retirement accounts, including 401(k) plans. However, it does not affect Roth IRAs (at least, not during the lifetime of the account holder).

2. New rules for 2024

The new life expectancy table means that everyone’s RMD has changed.

RMDs changed significantly in 2024. First, the IRS released a new life expectancy table. You’ll need the numbers in this table to determine exactly how much to withdraw. These updated tables will typically result in lower RMDs than the previous table, allowing retirees to keep their money invested longer.

However, the penalties for not taking RMD have also changed, generally becoming less stringent.

3. How RMDs are calculated

You can calculate your RMD with a single operation on a calculator.

Calculating RMD is relatively simple. Simply divide your account balance on December 31 of the previous year by the life expectancy factor found in the IRS tables. This formula is relatively simple and there are even several online calculators you can use.

(Things can get a little more complicated if you have a spouse who is significantly younger than you, and there are a few other exceptions.)

4. Tax Implications of RMDs

RMDs are taxable income, so you’ll need to plan your tax strategy with them in mind.

RMDs are taxed as ordinary income, just like other retirement withdrawals. Therefore, you will need to plan to pay taxes on this income and possibly be in a higher tax bracket. To mitigate this tax impact, consider strategies such as converting portions of your traditional IRA to a Roth IRA before you reach RMD age, allowing for tax-free withdrawals later.

RMDs can also affect other sources of income, such as Social Security benefits.

5. Penalties for missing or incorrect RMDs

Failure to meet your RMD can result in large penalties.

There are potential penalties for not taking RMDs or taking less than required. Currently, the IRS imposes a penalty of 25% of the amount you did not take. For 2024, the penalties have been revised, but you still need to make sure you complete those withdrawals. For this reason, we recommend that you keep track of the minimum distribution deadlines and stick to them.

If you miss an RMD, promptly withdrawing the missed amount can help mitigate the penalties.

6. RMD Strategies to Minimize Taxes

There are a few strategies you can try to minimize your RMD tax payments.

The main reason retirees don’t like RMDs is because of taxes. Fortunately, you can minimize your tax burden somewhat by being smart with your RMDs. For example, spreading withdrawals throughout the year can help avoid increases in income that can affect your tax bracket.

Additionally, if you are charitable, you can make Qualified Charitable Distributions directly from your IRA, and they count toward RMD (and are not included in taxable income).

7. The impact of RMD on estate planning

Meeting with a professional financial advisor can help you leave as much money as possible to your heirs.

RMDs can also have a big impact on estate planning. If you leave a traditional IRA to your heirs, they will likely be subject to RMDs as well. It is important to understand all this before RMDs creep up on your heirs. Consider it part of succession planning.

We recommend working with a financial advisor to develop strategies to minimize tax liability. A professional can help ensure that your beneficiaries receive maximum benefits from your retirement savings.

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