3 Required Minimum Distribution (rmd) Rule Changes That Happened This Year

Tax-deferred investment accounts and retirement plans like 401(k)s are an incredible tool to help build the wealth you need to carry you through your golden years. These accounts allow you to avoid paying taxes on what you invest up front. In turn, you pay taxes when you withdraw funds from them.

In order to ensure the government gets its cut, the IRS requires you to withdraw a certain amount each year once you hit 73. This is known as the required minimum distribution (RMD), and understanding the rules will help you avoid potential stiff penalties.

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The basics

The RMD is calculated by dividing the balance of your retirement account at the end of the previous year (2023) by your "distribution period" -- a number the IRS sets based on your age. You can find a list for reference here.

For 2024, you must withdraw your RMD from your account before Jan. 1, 2025, with one exception: If you turned 73 in 2024, you have until April 1, 2025, to make your RMD.

Let's use an example to illustrate. If you turn 75 this year and at the end of 2023, you had $500,000 in your retirement accounts, you need to withdraw $20,325.20 before the year is out. Here's the math: $500,000 / 24.6 = $20,325.20 -- remember, this table shows you what to divide your account balance by.

Let's take a look at some rules specific to 2024.

1. You can give more to charity

The IRS allows you to make a qualified charitable distribution. If you don't need the money, a donation made directly from an individual retirement account (IRA) -- the IRS doesn't let you make them from a 410(k), but you can roll funds over from your 401(k) into an IRA first -- to a qualified charity will satisfy the RMD requirement and allow you to avoid increasing your taxable income.

There's a limit to this, however, but that limit got a slight bump from 2023. This year, you are allowed to make qualified charitable distributions of up to $105,000. Any distributions over this amount will be subject to tax, regardless if it goes to charity.

2. Roth 401(k)s now align with Roth IRAs

Those with either a Roth 401(k) or Roth 403(b) will no longer have to take an RMD. However, while this rule goes into effect this year, it applies to 2024 funds, meaning you still need to take the RMD if you had funds in a Roth 401(k) at the end of 2023.

The move aligns the rules with those for Roth IRAs, which already do not require distributions.

3. This is the last year the IRS will grant another exception for beneficiaries

In the past, when a person inherited an IRA, they were allowed to stretch out the distributions over a lifetime. That changed significantly in 2019. Now beneficiaries must distribute all the funds within 10 years.

However, because of the COVID-19 pandemic and some initial confusion surrounding the rule change, the IRS decided to waive the requirement through 2024. This is the last year that beneficiaries will be able to avoid taking distributions, so if this applies to you, make sure you are set up to do so in 2025.

Avoid paying penalties

The IRS will charge you 25% in addition to whatever taxes you already would owe on any RMD you fail to take in time. That kind of penalty defeats the purpose of using a tax-deferred account in the first place, so make sure you take yours in time. If you do miss it, however, the IRS will reduce the penalty to 10% if the mistake is corrected within two years, and will even consider waiving the penalty altogether on a case-by-case basis.

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