For a good number of senior citizens, the beginning of the end of 2024 marks a tight financial deadline. As December rolls in on the 31st day, those who have retired will know about the compulsory minimum distributions (RMDs) from certain retirement accounts. It is a date that should not be ignored. If you are now of the age at which the IRS requires you to begin withdrawing from tax-deferred savings, now’s the time to do it to avoid very hefty penalties.
RMDs are the withdrawals that have to be taken from tax-favored retirement accounts—for example, a traditional IRA or a 401(k). All these accounts permit the funds to grow tax-free till the time they trickle down to an account and are then taxed. The government therefore had to require such withdrawals to ensure that the retirement savings, which have enjoyed tax-deferred growth, would eventually be taxed.
As the year 2024 draws to a close, there will be an impending financial deadline among most retirees. The deadline always comes on December 31 for the required minimum distributions (RMDs) from certain retirement accounts, which one shouldn’t ignore. Well, if you reached an age when the IRS requires you to withdraw from tax-deferred savings, you should not take unnecessary risks. You should take action now to avoid very hefty penalties.
They’re mandatory distributions from tax-favored retirement accounts, such as traditional IRAs and 401(k)s, which allow them to grow tax-free until eventually taxable upon distribution. These mandatory withdrawals make sure that the retirement savings that have enjoyed tax-deferred growth end up being taxed at some time.
Who is affected by RMD rules?
All individuals who turn 73 in the year 2024 will be mandated to begin receiving their RMDs. This is yet another new age requirement that was mandated by legislation and is set to increase the required starting age for RMDs to 75 by the year 2033. Inherited IRAs have separate but more complex rules about RMDs, and individuals who inherit these accounts must know the specific rules that apply to them.
Even though the first RMD can be delayed until April 1 following the year that you turn 73, subsequent RMDs must be taken by December 31 of each year. In this regard, the year 2024 means that you need to take your RMD by the end of the year to avoid penalties. The amount that has to be withdrawn is figured based on the retirement account balance on December 31 from the previous year along with the life expectancy factor as per those IRS tables.
The penalty for missing the deadline
Failing to take the correct amount by December 31 can result in steep penalties. The penalty for not withdrawing the required amount is 25% of the amount not taken. This penalty was reduced from 50% thanks to changes made under the SECURE 2.0 Act, but it still represents a significant financial setback that could impact your retirement savings.
Steps to take before the December 31 deadline
1. Review your retirement accounts: Start by identifying all of your retirement accounts that are subject to RMDs. This includes traditional IRAs, 401(k)s, and similar tax-deferred accounts.
2. Calculate your RMD: Once you know which accounts require RMDs, calculate the total amount that you need to withdraw. This calculation is based on the balance of your accounts as of December 31 of the previous year, as well as the IRS life expectancy tables.
3. Plan your withdrawals: Decide which account(s) to use to satisfy your RMD. If you have multiple IRAs, for example, you can withdraw the total RMD from one account, as long as the full amount is taken across all your accounts.
4. Consider tax implications: Keep in mind that RMDs are taxable income, and withdrawing funds from your retirement accounts will likely affect your overall tax situation. Planning ahead can help you manage the tax impact.
5. Take the distribution: Ensure that the funds are withdrawn before the December 31 deadline. This will prevent any penalties from accruing.
6. Keep records: Document your RMD withdrawals for your tax records. This will help you accurately report the distribution when filing your taxes.
Special circumstances to keep in mind
One exception and special situations where wills are in common regarding RMDs. The most popular exception is the “Still Working” exception. Continue working beyond the age of 73 and owning 5% or less of the company, and you can probably avoid RMDs from any retirement plan of your current employer while continuing to work. Obviously, IRAs and plans from former employers do not qualify for this exception.
The first RMD for 2024, which is due April 1, 2025—in other words, the initial distribution has to be made. Should this be delayed until April, you will need to take two distributions in 2025: one for 2024 and one for 2025, raising significant tax implications.
Take action now to avoid penalties.
December 31 is the deadline for RMDs, a date that means a lot to retirees. To avoid penalties and maximize your retirement income strategy, knowing the rule, calculating one’s RMD, and timely taking action will honor the spirit of the law. Not really sure about your RMD or how to process it? If nothing else, consult a financial advisor or tax professional who can help guide you through the complexities of retirement planning and help you optimize your strategy for years to come.
