Most Americans have some form of a retirement account. These 401(k)s, IRAs, and other similar saving methods are quite popular as they come with tax breaks, but along with the pros come the rules that can make managing them difficult. Since these accounts are meant to be used during retirement, beneficiaries must take money out of them at some point and these mandatory annual withdrawals are better known as required minimum distributions (RMDs).
Knowing the rules around these RMDs is paramount to unsure all your hard earned money is used for its intended purpose and not to pay fines to the Internal Revenue Service (IRS). So, here are a couple of rules you should be aware of
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RMDs are no longer required from Roth 401(k)s or Roth 403(b)s
The main reason why RMDs are necessary is because many accounts were tax advantaged and thus at some point the government expected its share in taxes. Roth 401(k)s and 403(b)s always got funded with after-tax dollars, but until now RMDs were still required. A common loophole was to roll the funds over to a Roth IRA, but this could be complex and took time.
Thankfully the IRS has eliminated this provision and now all Roth retirement account funds are exempt from RMDs, which allows for you to keep the money in those accounts indefinitely.
Tax deferred accounts will still need to be used and thus taxed, with he first RMD for those over 73 needing to happen before April 1, 2025. Following years will require you to take the money out and pay taxes before Dec. 31 of that year
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Qualified charitable distribution limits are increasing
Some lucky individuals have more money saved than they need and thus taking the RMDs is nothing but a tax problem for them. Thankfully, there is a way to alleviate this tax burden and that is by making a Qualified charitable distributions (QCDs).
Given that skipping an unneeded RMD comes with a 25% penalty, plus the taxes on the amount, plus the amount still needs to be take out, just donating the money and getting a tax break seems like a better idea in the long run. It will mean that the money taken out of the account will not count toward your taxable income and you may get additional tax deductions.
Just so you know, the maximum QCD in 2023 was $100,000 and it rose to $105,000 in 2024. The 2025 figure is still unclear, but it has been confirmed that it will rise again. Even though only the wealthiest retirees could afford a QCD of this amount every year, it is still an option for those who do not want to go over the limit for their tax bracket. When it comes to charity every cent counts.
Do bear in mind that not every charity will count for this QCD. It needs to be a tax-exempt organization according to the IRS, otherwise it will not count. Once you have selected your organization of choice, you will have to contact your retirement account provider and request that the funds be sent to the charity organization and not your bank account. If the money goes through your account it will count for tax deduction purposes, but not as a QCD, so to ensure that the effort is worthwhile, follow the rules.
As a last step, you will need written acknowledgement from the charity listing the date and the amount of your donation. Most charities should be able and willing to do this without any problems but contact them first to warn them of the fact that you will need this following your donation just in case. This paper will not be needed for your taxes, but if you are audited if will be requested in order not to invalidate your QCD.
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