Required minimum distributions (RMDs) generally begin at age 73 for traditional IRAs, SIMPLE IRAs, SEP IRAs, and other retirement plans, serving to limit how long tax-deferred accounts can grow without withdrawals. An RMD is the minimum amount you must withdraw each year. The RMD amount is based on your account balance and IRS life expectancy tables. If you prefer, you can also withdraw more than the minimum required.
Under SECURE Act 2.0, the starting age for RMDs (which is based on your birth year) has increased.
- Born before July 1, 1949, RMD age is 70.5
- Born July 1, 1949 to December 31, 1950, RMD age is 72
- Born January 1, 1951 to December 31, 1959, RMD age is 73
- Born January 1, 1960 and after, RMD age is 75
Your first RMD is due by April 1 of the year after you reach the starting age. You can delay the RMD until April 1, but you will need to take two RMDs that year, one in April and one by December 31. The additional income may have tax implications. All subsequent RMDs must be taken by December 31 of each year.
Under the SECURE 2.0 Act, Roth 401(k) account holders are no longer required to take RMDs, effective in 2024. The new rule puts Roth 401(k)s in line with Roth IRAs, which also have no distribution requirements for retirement. Previously, retirees with a Roth 401(k) would have had to roll their account into a Roth IRA to avoid RMDs, but now that extra step is no longer needed.
If you are still employed, you do not have to take an RMD from your current 401(k), regardless of your age, unless your employer requires it. Any individual who owns more than 5% of the company that sponsors the plan, must begin RMD’s when required, regardless of their ongoing employment.
Calculating Your RMD
The RMD amount is calculated annually by dividing your account balance as of the previous year-end by a distribution period from the IRS’s “Uniform Lifetime Table.” If you have more than one tax-deferred account, you must calculate the RMD for each one. You can take the total RMD from one account or a combination of accounts unless you have more than one 401(k) or 457(b) account. In this case, you must calculate the RMD and withdraw the amount from each account separately.
Impact on Taxable Income
RMDs are treated as ordinary income for tax purposes. Withdrawals are included in your taxable income except for any part previously taxed (which is your basis).
Qualified Charitable Distribution (QCD)
The QCD rule allows traditional IRA owners to donate part or all of their RMDs to a qualified charity. Although QCDs cannot be used as a charitable deduction, the QCDs effectively reduce your income taxes by lowering your adjusted gross income. This is a tax benefit even if you do not itemize. Currently, you can contribute up to $105,000 of your RMD directly to a charity.
Impact on Medicare Premiums
The standard monthly premium for Medicare Part B is currently $174.70 and is projected to increase to around $185 in 2025. However, higher-income individuals may face an additional surcharge known as the Income-Related Monthly Adjustment Amount (IRMAA) based on income from two years prior. If an RMD increases your income, it could push you into a higher bracket, increasing Part B premiums.
IRMAAs also affect Part D drug plans, which vary in monthly cost by plan. An RMD may increase your income enough to qualify you as a higher earner, potentially leading to an added Part D surcharge. A QCD may help to reduce the impact that your RMDs will have in the Medicare cost calculation.
Inherited Accounts
The SECURE Act significantly changed inherited IRA rules, eliminating the “stretch IRA” option. This estate planning strategy allowed non-spouse beneficiaries to extend inherited IRA distributions and tax benefits over multiple generations. Now, most beneficiaries must fully withdraw inherited IRAs within 10 years rather than stretching distributions over their lifetime.
The original IRA owner’s date of death and the type of beneficiary determine the applicable distribution method. If the owner had an unmet RMD obligation at the time of death, beneficiaries must take an RMD for that year. The stretch IRA option remains available for IRAs inherited before December 31, 2019. For IRAs inherited after this date, the 10-year rule generally applies, with exceptions for spouses, minor children, disabled individuals, and beneficiaries within 10 years of the original owner’s age.
The IRS waived RMDs for newer beneficiaries from 2021 to 2024, but they will resume in 2025, with the entire balance due within 10 years of the original owner’s death. Beneficiaries might consider early distributions if future income—and tax rates—are expected to increase.
Penalties for Not Taking an RMD
Missing an RMD can be costly, with penalties reaching up to 25% of the required withdrawal amount. Under SECURE Act 2.0, this penalty was reduced from 50% and drops to 10% if the error is promptly corrected for IRAs.
Understanding the impact of RMDs is essential for managing your retirement savings effectively. From understanding when and how much to withdraw to being aware of the effect on taxes, income-related benefits, and healthcare costs, RMDs play a crucial role in financial planning for retirement. Proper timing and planning around your RMDs can help you minimize penalties, reduce taxable income, and control Medicare costs, allowing you to keep more of your hard-earned retirement savings.
Contact your Stephano Slack tax manager or partner at 610-687-1600 or [email protected] for personalized guidance tailored to your unique financial situation. Taking proactive steps today can ensure a smoother, more secure financial future.
Author Brooke Carroll, CPA, manager oversees the individual tax practice at Stephano Slack’s office in Wilmington, Delaware. She brings exceptional value to client relationships by translating complex tax laws into clear guidance, helping clients confidently navigate their tax responsibilities. With 20 years of public accounting experience, Brooke provides a personalized approach to managing intricate tax issues, especially those involving the IRS, ensuring clients feel informed and supported throughout the process. Brooke can be contacted at 302-295-1025 or [email protected].
Recent Comments