Taking Your Required Minimum Distribution: Is This Still on Your 2024 To-Do List?
Posted November 2, 2024
Posted November 2, 2024
As we approach the end of the year, let’s fast-forward to New Year’s Eve. Imagine it: the holiday festivities are winding down, you’re surrounded by family and friends, ready to usher in a new year, and the clock is counting down to midnight. It’s a moment of reflection, celebration, and anticipation. But before the year is out, there are some critical financial tasks to complete, especially if you’re over 73 with retirement accounts that require a Required Minimum Distribution (RMD).
If you’re 73 or older and have a traditional IRA, 401(k), or similar retirement account, ensuring you’ve taken your RMD by December 31, 2024 is essential. Let’s explore why taking your RMD on time should be at the top of your year-end checklist.
First, a quick refresher: an RMD is the minimum amount the IRS requires you to withdraw annually from most retirement accounts once you reach a certain age. For many years, this age was 70½, but recent changes under the SECURE Act pushed it to 73 (and soon it will be 75). This distribution requirement applies to traditional IRAs, 401(k)s, and some other tax-deferred retirement accounts, although Roth IRAs aren’t subject to RMDs while the account owner is alive.
The IRS imposes strict penalties for missing RMDs. Failing to take the required amount can result in a penalty of up to 25% of the amount that should have been withdrawn (this is in addition to income taxes). That’s a substantial hit, especially when it’s entirely preventable. As of 2024, however, recent changes under the SECURE 2.0 Act have lowered this penalty from 50% to 25%, with an additional reduction to 10% if the oversight is corrected promptly. Although this is a positive change, the penalties are still significant enough to warrant timely action.
This deadline could also lead to additional complications in tax filing and financial planning, and the penalties can snowball into further issues if not addressed promptly. Avoid the stress and financial impact of these penalties by planning ahead. This is also an excellent time to connect with a tax advisor, who can help ensure compliance and explore any available solutions if the deadline has passed.
RMDs are considered taxable income, meaning they can potentially affect your tax bracket, Medicare premiums, and even Social Security taxes. For example, taking a large RMD might push you into a higher tax bracket or trigger additional taxes on your Social Security benefits (IRMAA surcharges). This is why working with a financial advisor to incorporate RMDs into your broader income strategy is essential.
An effective RMD strategy will consider the impact of these distributions on your overall tax burden, helping you make choices that minimize taxes while meeting your needs. Your advisor may also discuss a “qualified charitable distribution” (QCD) with you if charitable giving is part of your goals. QCDs allow you to directly donate up to $100,000 per year from your IRA to a qualified charity, fulfilling the RMD requirement without increasing your taxable income.
If you turned 73 in 2023 or earlier, the requirement to take RMDs is already in effect. The SECURE Act raised the RMD age from 70½ to 73, meaning anyone hitting that milestone should mark December 31 as a key date in their financial calendar. For those just entering this phase, now is an excellent time to familiarize yourself with the requirements and deadlines associated with RMDs.
Planning for RMDs goes beyond just this year, too. As you age, other financial considerations might come into play. The age for required distributions is set to increase to 75 in 2033, so staying informed about future changes can benefit both you and your heirs. Reaching out to your financial planner can help you plan these milestones effectively. Wondering what other important and significant age milestones there are? Reach out to our team and we’ll be glad to talk with you!
Here are a few extra tips to consider:
If 2024 is the first year you’re required to take an RMD, you’re in luck—you have a bit of flexibility. The IRS allows you to delay your first RMD until April 1 of the following year (April 1, 2025, in this case). However, delaying the first RMD will mean taking two RMDs in one year, which could significantly impact your tax bracket and increase your overall tax bill. We recommend discussing this option with a financial advisor to determine the best timing for your situation.
Adding “take RMD” to your year-end checklist may not feel as festive as holiday planning, but it’s crucial. Acting now can spare you the financial and administrative stress of missing the deadline and give you greater control over your income planning.
Our team at Thayer Financial is here to guide you through each step of the RMD process, helping you navigate the regulations while keeping your broader financial picture in focus. By planning ahead, you can make decisions that align with your goals and preserve your wealth for the future.
The countdown to the New Year often inspires us to take stock of what’s important. Completing your RMD by December 31st ensures that you’re compliant with IRS rules, but it also represents something more profound: a commitment to managing your finances proactively. By addressing your RMD now, you’re avoiding penalties and setting yourself up for a financially secure new year.
Let’s cross this year-end task off your list together. Contact our team at Thayer Financial to create a plan tailored to your needs and goals.
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