Make sure you know these new required minimum distribution (RMD) rules.

Knowing these important rules will help you save on taxes and fees.

Adam Levy
| The Motley Fool

One of the biggest benefits of saving in traditional retirement accounts like 401(k) or IRA are the advance tax benefits you receive. You will not have to pay income tax on contributions in the year you make them. This can give you extra money now, allowing you to save more for retirement.

But you can’t defer those income taxes forever. After all, Uncle Sam wants his share. This is why the IRS imposes required minimum distributionsor RMD. As the name suggests, account holders who are eligible for RMDs are required to withdraw a certain amount of money from their accounts. RMDs apply to anyone age 73 or older and can also apply to inherited IRAs, regardless of the age of the account owner.

The penalty for missing an RMD can be quite high—up to 25% of the amount you should have withdrawn—and you’ll still have to take distributions and pay income taxes on top of that. So, you can’t miss filing RMDs on time (usually by December 31st of each year).

Unfortunately, the rules are constantly changing, so keeping up with the latest rule changes is of the utmost importance to avoid finding yourself in debt to Uncle Sam. Here are three newly updated RMD rules everyone should know before the end of 2024.

Roth 401(k)s are now exempt from RMDs.

Just as important as taking your full RMD on time is avoiding unnecessary withdrawals from your tax-sheltered account. That’s why every retiree should know this. Roth 401(k)s are now exempt from RMDs following the passage of the SAFE Act 2.0.

Avoiding RMDs in a Roth 401(k) used to require transferring funds from a Roth 401(k) to Roth IRAs that do not have required minimum distributions. However, this process may cause investors to lose access to certain investment options they liked in their 401(k).

An additional problem may arise for anyone who has never opened a Roth IRA before. Opening a new Roth IRA and transferring funds into it makes them a subject five year rule. Any earnings on your investments are blocked for five years from the year you open your first Roth IRA if you want to avoid taxes and penalties. As a result, retirees may find themselves with less access to their retirement savings.

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The new rule solves this problem by putting the Roth 401(k) on equal footing with the Roth IRA.

Owners Inherited IRAs May Not Have to Distribute This Year

The Security Act made some big changes to inherited IRAs. Instead of being able to stretch out withdrawals throughout your life, called a stretched IRA, most beneficiaries now have to distribute the entire account within 10 years of inheritance. If the original account owner was already subject to required minimum distributions, the beneficiary must also continue to pay annual RMDs.

If you inherited an IRA before December 31, 2019, you can still take out a rollover IRA. You’ll have to do required minimum allocation this year as a result.

The new rule applies to anyone who inherited an IRA from someone who died after December 31, 2019. There are exceptions for spouses, children under age 21, individuals with disabilities, and beneficiaries less than 10 years younger than the original owner. .

Due to some confusion regarding the rule changes as written in the CARES Act, the IRS has eliminated the RMD requirement for new beneficiaries for 2021 through 2024 (the CARES Act eliminated RMDs for everyone in 2020). So, if you inherited an IRA from someone after December 31, 2019, you don’t have to take a distribution that year, even if the original owner was eligible for an RMD.

However, beneficiaries will have to begin taking RMDs in 2025, according to a ruling released by the IRS this year. They will also still have to distribute the entire account within 10 years of inheriting it. So, it makes sense to take the distribution this year anyway, unless you expect your personal income (and tax rate) to decline before the 10-year term ends.

Reduce your RMD to $105,000 with a charity event

One of the best ways for retirees to donate to nonprofit organizations is through a qualified charitable organization, or QCD. A QCD allows you to make distributions directly from an IRA to a qualified nonprofit organization, and the good news is that the QCD counts toward your RMD. The IRS increased the limit for QCDs in 2024 to $105,000, up from $100,000 previously.

Please note that this rule only applies to IRAs. Any savings in a defined contribution plan, such as a 401(k), are still subject to RMDs. And you can’t take a distribution from an IRA and count its RMD requirement against your 401(k).

There are great financial benefits to distributing funds directly from your IRA to charity. The distribution is never shown as gross income, as is the case with a regular distribution. Although you could do a giveaway and then donate to a charity for tax deductionyou’ll have to itemize your deductions to get the tax benefits.

A QCD allows you to donate to charity and take the standard deduction without missing out on tax advantages. This could result in lower income taxes, a lower percentage of Social Security income that is taxed, and a reduction in your Medicare premiums.

You can begin making qualified charitable contributions at age 70 1/2, long before RMDs begin. Even if you donate under the $105,000 limit, they can be a great way for charitable-minded people to reduce their RMDs and keep taxes low.

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