Retirement Planning Update: RMD Age Changes
Understanding the RMD and QCD, in this week’s Fastest 4 Minutes in Finance.
Let me first say that I hope you had a Merry Christmas! And with Christmas in the past, that means there are only a few days left in 2024.
It’s crazy to me that 2025 is almost here. The end of the year always seems to sneak up on me. If it sneaks up on you, we’ve got an investment reminder and a tax savings idea in this week’s segment.
Required Minimum Distributions (RMDs): New Rules
Let’s start with the RMD. That stands for Required Minimum Distribution. This is a designated amount that is required by the IRS to withdraw from your retirement accounts beginning at a certain age. That age has changed over recent years. To keep it simple, the current RMD age is 73, if you reached age 72 after December 31st, 2022. If you were already 72 before that date, you should already be taking RMDs. If you turned 73 this year, you are required to withdraw a specific amount, based on your account value at the end of 2023. You have until April 1, 2025 to take your first RMD. Every year after that, it must be taken by the end of the calendar year.
Retirement Accounts and RMD Calculations
The RMD rules apply to all employer sponsored plans and traditional IRAs. It does not apply to Roth IRAs. The amount is calculated based on a life expectancy table that the IRS publishes. The RMD must be calculated for each retirement account you own, but, the cumulative amount can be withdrawn from a single account to satisfy the RMD.
RMD Penalties and Tax Implications
Sound complicated? It is. And if you get it wrong, it can be costly. If you don’t withdraw enough to satisfy the RMD, the amount not withdrawn is subject to a 25% penalty. That’s on top of the taxes due on the withdrawal.
So, it’s a good idea to work with a financial advisor to make sure you are getting that right.
I mentioned the tax on the RMD. The withdrawal is taxed at ordinary income tax rates. It will be stacked on top of the other income you received in 2024. So, it could push you into a higher tax bracket.
Qualified Charitable Distributions (QCD): Tax-Savings Strategy
That brings us to the QCD. This stands for Qualified Charitable Distributions. It is a charitable donation made from your IRA. There are two big benefits. First, the distribution is tax-free, if it is made directly to the charity. Second, the distribution counts toward your Required Minimum Distribution. So, if you are charitable-minded, you can send your distributions to your favorite charity, not be taxed, and potentially not have to receive a taxable distribution after you reach age 73.
QCD Eligibility and Limits for 2024-2025
You are actually eligible to make a QCD at age 70 ½. That used to be the RMD age. And the limits are high. For 2024, you can make up to $105,000 in Qualified Charitable Distributions. The limit goes up to $108,000 next year.
It’s important to note that QCD’s are only available from an IRA, not an employer-sponsored plan. That’s another reason to work with a financial advisor.
As we close out the year, I want to say thanks to everyone who listens and watches the Fastest 4 Minutes in Finance. We look forward to bringing you more in 2025.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Advisor Alliance. Independent Advisor Alliance and GenWealth Financial Advisors are separate entities from LPL Financial.
