Most Americans rely on retirement accounts like 401(k)s, IRAs, and similar savings options, which are popular due to their tax advantages. However, managing these accounts can get tricky due to mandatory withdrawal rules known as required minimum distributions (RMDs). Knowing these RMD rules is essential to avoid penalties and to ensure your retirement funds go toward your needs, not fines to the IRS.
Here’s a breakdown of the new RMD rules and what they mean for you:
RMDs
RMDs are in place so the IRS can eventually collect taxes on pre-tax retirement accounts. Until recently, Roth 401(k)s and Roth 403(b)s—accounts funded with after-tax money—were still subject to RMDs. People often rolled Roth 401(k)s into Roth IRAs to avoid RMDs, but this process was time-consuming.
The IRS has changed this rule, exempting Roth 401(k)s and Roth 403(b)s from RMDs. This update allows Roth account holders to let their funds grow indefinitely without withdrawals, maximizing tax-free growth. Unlike traditional 401(k)s or IRAs, Roth accounts now offer greater flexibility by removing the RMD requirement.
However, for tax-deferred accounts like traditional 401(k)s or IRAs, RMDs are still mandatory. If you turn 73 after 2025, your first RMD is due by April 1 of the year after you turn 73. Every following year, you’ll need to take your RMD by December 31. If you miss an RMD deadline, the IRS imposes a penalty, so mark your calendar.
Qualified Charitable Distributions
Some retirees have more funds than they need, making RMDs feel more like a tax hurdle. In this case, qualified charitable distributions (QCDs) offer a tax-smart solution. QCDs allow you to donate RMDs directly to charity, keeping the distribution from counting as taxable income and potentially avoiding a higher tax bracket. Plus, QCDs may give you extra tax deductions.
The QCD limit, which rose from $100,000 in 2023 to $105,000 in 2024, may increase again in 2025. While few retirees may donate the full QCD limit, it’s beneficial for those who want to avoid a higher tax burden while supporting charitable causes. Remember that a QCD must be directed to an IRS-qualified, tax-exempt charity for it to count.
Steps to Make a Qualified
To ensure your QCD counts toward your RMD and provides tax advantages, follow these steps:
- Verify the Charity’s Eligibility: The charity must be a tax-exempt organization recognized by the IRS. You can confirm this by checking the IRS Exempt Organizations database.
- Direct the Distribution Correctly: Contact your retirement account provider to request that the QCD amount is sent directly to the charity. If the funds go to your bank account first, they won’t count as a QCD—even if you eventually donate them.
- Obtain Written Acknowledgment: The charity should provide a receipt with the amount and date of your donation. While not needed when filing taxes, it’s essential if the IRS audits you.
When done correctly, a QCD lets you meet your RMD obligation without adding to your taxable income. Following these steps is a tax-smart move, allowing you to fulfill your RMD requirements while supporting causes you care about.
RMD rules may seem complex, but staying informed helps you avoid IRS penalties and keeps your retirement savings working for you. By knowing these updates, you’ll be better prepared to maximize your funds, reduce tax liabilities, and contribute to meaningful causes.
FAQs
Do Roth IRAs have RMDs?
No, Roth IRAs are exempt from RMDs.
What’s the QCD limit for 2024?
The QCD limit for 2024 is $105,000.
When is the first RMD due for those over 73?
It’s due by April 1 of the following year.
Can any charity receive a QCD?
No, only IRS-qualified, tax-exempt charities qualify.
Is a receipt required for QCDs?
Yes, in case of an IRS audit, you need proof.
