IN THE PROFESSION Following the RMD rules carefully is important because the penalty for not taking an RMD is 25 % of the amount of the RMD that is not taken in time . The penalty was reduced from 50 % for a missed penalty for the year 2022 or earlier . The penalty can be reduced to 10 % with timely correction or completely abated for a reasonable cause .
Not taking an RMD and incurring the penalty negates the tax benefits of not having to pay the tax when the income was earned . Also , retirement accounts are frequently a person ’ s largest asset , maybe even worth more than their home . That means that the RMD amounts are often quite large . My advice is that consultation with a knowledgeable professional is warranted . I ’ m not even giving this advice with a disclaimer that we do not have a client relationship . The advice is axiomatic . In preparation for writing this article I looked up a document explaining the final regulations relating to RMDs . The document , Treasury Decision 10001 , is 157 pages . It was published in the Federal Register for July 19 , 2024 . I thought referencing a 157 page document would persuade most people to ask for help .
What changed for retirement savers ? The 70½ RMD starting date that was for everyone was increased to 72 for those born between July 1 , 1949 and January 1 , 1951 and 73 for those born after that , but before January 1 , 1959 . The final rules don ’ t address 1959 . Proposed rules , which are still subject to public hearing and potential changes , include those born in 1959 as part of the 73 years old starting date group . Those people are turning 65 this year so the government has eight years to finalize whether their starting date is 73 , 75 , or some other date . The RMD starting date for those born during 1960 and after is 75 .
Inherited IRAs are another story . Inherited plans from a participant who is already receiving RMDs are required to have distributed the entire account balance within 10 years . The distributions are required to be taken annually . Initially , there was an expectation that all the income could be taken in the tenth year . The 10 year rule doesn ’ t apply to a surviving spouse , a disabled or chronically ill beneficiary , or a beneficiary who isn ’ t more than 10 years younger than the participant . A surviving spouse may elect to have the inherited account become his or hers as if it had always been his or hers . That rule permits the surviving spouse to start RMDs on his / her own starting date using his / her life expectancy .
ROTH accounts . ROTH accounts , named after the late Delaware Senator William Roth , are the opposite of traditional IRAs or 401 ( k ) s in requiring the income tax to be paid in the year the income is earned and providing tax-free income when distributions are made . ROTH accounts are the same as traditional plans in being tax-exempt for yearly earnings in the account . A noteworthy issue in discussing RMDs is that RMDs are not required for ROTH accounts and distributions from ROTH accounts do not reduce RMDs from traditional plans .
Qualified Charitable Distributions ( QCD ) s . Only IRA distributions can qualify as QCDs . Even though the starting date for RMDs has been changed to later ages , QCDs can be made for every plan participant at 70½ . QCDs are probably the best tax-wise way to make charitable contributions , especially if RMDs are required for the year . Distributions directly from an IRA to a charity that meets the QCD rules are not included in taxable income and are not itemized deductions . Itemized deductions are limited and the standard deduction is enlarged through 2025 . That means that the value of a charitable deduction is less than a reduction of gross income from a QCD .
I believe I have already written more than most people care to know or need to know , especially if they take my advice and hire a knowledgeable professional to guide them through the many rules and exceptions to the rules related to RMDs . Remember to avoid issues related to what you don ’ t know that you don ’ t know .
16 AUGUST / SEPTEMBER 2024