Nearly all those 73 and older will have to make a required minimum distribution (RMD) for 2024. This is a mandatory withdrawal from your retirement account designed to force you to pay the taxes on your savings.
Everyone's RMD looks different depending on their age and account balance at the end of 2023. In some cases, RMDs could be five figures. That's understandably going to have a huge effect on your tax bill.
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You can't just skip RMDs, though. The IRS will charge you a 25% penalty on the amount you should have withdrawn but didn't. That could cost you more than just paying income taxes on the RMD in the first place. If you want to avoid the tax consequences associated with an RMD, there's really only one option.
First, check if you actually need to take an RMD
You calculate your RMDs for the year by taking your account balance at the end of the previous year -- 2023 in this case -- and dividing it by the distribution period for your age in the IRS Uniform Lifetime Table. For example, if you had a $100,000 IRA balance at the end of 2023 and you're 75 this year, your RMD would be $4,065. That's $100,000 divided by the 24.6 distribution period for 75-year-olds. You can withdraw more than this, but you generally aren't allowed to take less.
There are exceptions, though. If you're still working and own less than 5% of the company, you can skip RMDs from that workplace's retirement plan only until the year after you retire. But that doesn't get you off the hook for RMDs from IRAs or employer-sponsored retirement plans connected to previous jobs.
Beginning this year, you can also skip RMDs from Roth 401(k)s and Roth 403(b)s since these are funded with after-tax dollars. The same goes for Roth IRAs, which have long enjoyed this special tax treatment.
But if you're at least 73 and have at least one retirement account that doesn't fall under one of the above exceptions, you must take an RMD from it this year. If you just turned 73 in 2024, you technically have until April 1, 2025, to make your first RMD. Otherwise, the deadline is Dec. 31, 2024. Follow the process above to determine what your 2024 RMD should be, and then check how much you've already withdrawn from your account for the year to see if you've already met your RMD requirement.
Keep in mind that you can combine RMDs from multiple IRAs. For example, if you had an RMD of $5,000 from one IRA and an RMD of $3,000 in another IRA, you could withdraw all $8,000 from a single IRA, withdraw $4,000 from each, or make any combination of withdrawals totaling at least $8,000 by Dec. 31st. This isn't an option for 401(k)s, though.
You must withdraw the specified amount from each 401(k). So if you have two 401(k)s, one with a $5,000 RMD and another with a $3,000 RMD, you can only take $5,000 from the first and $3,000 from the second to avoid IRS penalties.
Consider a qualified charitable distribution (QCD) to get around the RMD rule
The only real way to get around the IRS's 25% penalty if you have to take an RMD this year is to take a qualified charitable distribution (QCD) instead. This is where you request that your retirement plan administrator donate your RMD -- or any portion of it that you haven't taken for yourself throughout the year -- to a qualifying charity of your choosing. It's essential that the money goes directly from the account to the charity without ever passing through your hands.
If you do this, the IRS won't charge you a penalty or add the RMD funds to your taxable income for the year. Plus, you'll get the benefit of helping a good cause. There's no way around the fact that the money is coming out of your retirement account, though.
If you think a QCD is right for you, the first step is to figure out which organization you wish to donate to. Check the IRS's tax-exempt organization list to make sure yours is on it. Then, contact your plan administrator to find out what you need to do to complete the transfer. It's best to do this as soon as possible, as it might take some time for the transfer to go through.
Follow up with the organization you're donating to and request that it send you some sort of written acknowledgment of the donation, including the date and the amount. You don't need to submit this when filing your taxes, but you'll need to present it if the IRS audits you to prove you actually made the QCD.
If you have any questions about this process, reach out to a tax professional who can help you with your specific situation. Just make sure your QCD is complete by Dec. 31 unless you qualify for the April 1, 2025, deadline for those who turned 73 this year.
