Everything You Need to Know About Required Minimum Distributions in 2024
As you probably know, 2023 was a banner year for stocks, with the Dow gaining nearly 14% and the NASDAQ up an impressive 43%. And that’s a good thing, right?
Right, to a point. While it’s always desirable to get a greater return on your investment, for those who have hit retirement age, a more robust stock market can also impact your required minimum distributions (RMD), which may have tax consequences beyond anything you’ve planned for.
Some financial experts say RMDs could hit an all-time high in 2024 due to the strong market as well as the larger number of people reaching the age of distribution. The bigger payouts may also push seniors into higher tax brackets, since RMDs are taxed as income.
How Do Required Minimum Distributions Work?
When you reach age 73 (the age was 73 up until the start of 2023), you must withdraw a minimum amount of money annually from your retirement plan accounts, which could include:
· IRA
· SEP IRA
· SIMPLE IRA
· Employer-sponsored accounts like 401(k) and 403(b)
Roth IRAs are not subject to RMDs.
Basically, these requirements are a way for the federal government to make sure it gets income tax on these tax-deferred accounts, which retirees could otherwise hold in perpetuity without making a withdrawal.
How Do You Calculate RMDs?
Take the balance in the account at the end of the last calendar year and divide it by your life expectancy (as calculated in this IRS chart).
Failing to meet your RMD can result in a penalty levied by the IRS, though if you can show your error was in good faith, the penalty may be waived.
What to Expect for RMDs in 2024
Essentially, higher returns on investment create higher RMDs if you have a lot of your retirement account tied up in the stock market. The bigger your retirement account, the more you will need to withdraw. The stock market has been volatile in the post-pandemic years and with the recession, so this may be the first time some younger retirees have experienced a jump in RMD and taxable income.
There is one silver lining. The IRS has adjusted income tax brackets due to high inflation the past few years. That could make the tax burden a little lighter than you may have expected a couple years ago.
If you still want to find ways to reduce your taxable impact, one option is to donate some of the RMD to charity. You can give away up to $105,000.
Navigating RMDs can be confusing, especially if you have a lot invested in the stock market and your accounts go up or down. If you’re looking for answers to questions about RMDs or anything else related to retirement, contact Jay for assistance.
