If you are required to take minimum distributions from a qualified retirement plan this year, you’ll want to brush up on two rule changes[1] that can help you manage taxes on your income in retirement.
RMDs are the required minimum distributions that individuals aged 72 or over (73 if you reached age 72 after Dec. 31, 2022) must take annually from traditional qualified retirement plan accounts. Generally, RMDs must be taken by December 31 each year. However, if you turned 73 in 2024, you have until April 1, 2025 to take your first RMD. After that, you’ll need to adhere to the annual December deadline to avoid penalties. The RMD rules apply to profit-sharing plans, 401(k), 403(b), and 457(b) plans, as well as traditional individual retirement accounts (IRAs), SEPs, SARSEPs, and SIMPLE IRAs.
While RMD rules do not apply to Roth IRAs or other designated Roth accounts during the account owner’s lifetime, they do apply to the non-spouse beneficiaries of inherited Roth accounts. That brings us to one of the most significant changes for RMDs is 2025 – the enforced penalty for certain beneficiaries of inherited IRAs.
Enforcement of the 10-year rule
Before the Secure Act of 2019, taxpayers inheriting an IRA could withdraw the funds over their lifetime, which could help reduce their yearly income taxes. However, since 2020, non-spouse inherited accounts have been subject to the “10-year rule,” meaning heirs must deplete all inherited IRA assets by the 10th year following the original account owner’s death.
After years of waiving penalties for missed RMDs from inherited IRAs, the IRS finalized its guidance last July. Starting in 2025, non-spouse beneficiaries must take yearly withdrawals during the 10-year window, or they’ll face penalties for missed RMDs. The penalty for not taking RMDs is 25% of the amount not withdrawn. The penalty can be reduced to 10% if the RMD is corrected within two years.
If you don’t need the funds, you can donate up to $108,000 of your RMD
While taking RMDs could push certain beneficiaries into a higher tax bracket, the increase in the amount taxpayers can contribute to charity through a qualified charitable distribution (QCD) could help close that gap. A QCD is a tax-free transfer of funds that can be used to satisfy all or part of your RMD. Starting in 2025, anyone aged 70 ½ or older can distribute up to $108,000 to a qualified charitable organization directly from an IRA. Keep in mind, the funds must be transferred directly from your IRA custodian to a qualified charity for the tax deduction to count. Since strict rules apply, be sure to call the office for more information before initiating a QCD.
To learn more about tax-smart strategies in retirement, call the office today to schedule a time to talk.
This information was written in part by KRW Creative Concepts, a non-affiliate of the broker-dealer.
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