Hefty Fines On the Horizon for Retirees that Don’t Take Their RMDs Before 2024 Ends

As we approach the end of the year, it’s crucial for retirees, especially those aged 73 and above, to focus on their Required Minimum Distributions (RMDs) for 2024. If you have a 401k or Traditional IRA, it’s time to ensure you’ve met your RMD obligations before December 31, 2024. This is particularly important because the age for initiating RMDs changed from 72 to 73 in 2024, affecting many retirees.

Understanding the RMD Deadline

Typically, the IRS offers an extension until April 1 of the following year for your first RMD. However, this extension is less relevant in 2024 due to the age change for RMD initiation. If you miss the RMD deadline, be prepared for a hefty 25% penalty on the amount you failed to withdraw. Thankfully, correcting this oversight within two years can reduce the penalty to 10%. However, this is still a significant financial hit, considering the additional taxes on the distribution.

Strategies to Manage RMDs

Working Retirees and RMDs

If you’re still employed and don’t own more than 5% of the company, you can delay RMDs on your employer-sponsored 401k. However, this deferral means larger RMDs in the future as your account balance grows, potentially leading to higher taxable income in retirement.

Leveraging Qualified Charitable Distributions

Charitably inclined retirees can use Qualified Charitable Distributions (QCDs) to manage their RMDs effectively. By directly transferring up to $100,000 from your IRA to a qualified charity, you can reduce your RMD amount while avoiding additional taxable income. For married couples, this amount can be as high as $200,000 collectively.

The Advantage of Roth IRAs

Roth IRAs offer a strategic advantage as they are not subject to RMDs during the owner’s lifetime. Converting traditional retirement accounts to Roth IRAs can be an intelligent move to manage future RMDs and associated tax burdens. While Roth conversions are taxable events, they can be financially beneficial in the long run.

Act Now to Avoid Penalties

With the end of the year fast approaching, it’s imperative to act now. Whether taking your RMD, utilizing a QCD, or planning a Roth conversion, ensure you complete these actions by December 31 to meet the 2024 deadline.

The Bottom Line

As we wrap up 2024, retirees must review their RMD requirements and take necessary actions. Remember, failing to meet your RMD obligations can result in significant penalties. Consider all available strategies, like QCDs or Roth conversions, to efficiently manage your RMDs and potentially reduce your tax burden. Time is of the essence, so make sure to address your RMDs before the year ends.