2024 RMD Updates and Advantages of Initiating Early Withdrawals

The SECURE 2.0 Act, which was signed into law in December 2022, changes the RMD rules for retirement savers beginning in 2023. A higher RMD age. A lower penalty for missing a withdrawal. New rules for qualified charitable distributions. The Roth 401 (k) RMD will be eliminated.

For the year 2024, it is essential to ascertain the commencement age for Required Minimum Distributions (RMDs) and familiarize oneself with the implications of failing to execute a withdrawal.

Preceding the enactment of the SECURE 2.0 Act, the age for initiating Required Minimum Distributions (RMDs) stood at 72 for retirement vehicles, encompassing traditional IRAs and 401(k)s. This legislation introduced modifications to the RMD framework in a two-phase approach. Initially, the RMD threshold was elevated to 73 as of 2023. Subsequently, by 2033, it will ascend further to 75. Individuals born between 1951 and 1959 are mandated to commence their RMDs post the age of 73, while those born in 1960 or later have the option to defer RMDs until after attaining the age of 75.

Critical timelines exist dictating when individuals must initiate withdrawals from their retirement accounts. While there exists a grace period for the inaugural RMD, subsequent RMDs must be undertaken annually. For individuals reaching the age of 73 in 2024, the first RMD can be executed by December 31, 2024, or they may opt for a deferred commencement until April 1, 2025. Opting for the latter entails a requirement to fulfill a second RMD by December 31, 2025.

Previously, RMD penalties were 50% of the amount that should have been withdrawn. But due to SECURE 2.0, the penalty for missing RMDs or failing to take the appropriate amount is 25% and can be as low as 10%.

The timing of Required Minimum Distributions (RMDs) holds significance. Numerous individuals hold the belief that it is advantageous to delay the withdrawal of their RMD until the year-end to maximize the tax-deferred growth potential of their accounts. While this notion seems logical at first glance, there are multiple compelling reasons why it may be more advantageous to proactively fulfill your RMD obligation earlier in the year.

1. To mitigate the impact of an unforeseen market decline

By deferring your RMD until the year-end, there is a risk of having to liquidate investments at a loss, which can have adverse effects on the long-term performance of your portfolio. A more prudent approach would be to opt for periodic RMD distributions throughout the year using investment dividends and interest. This strategy reduces your reliance on market fluctuations and minimizes the potential negative impact on your portfolio.

2. To optimize your gifting strategy

If your intention is to utilize your RMD for gifting purposes, either to a family member or as a charitable donation, initiating the distribution earlier in the year enables the funds to be utilized promptly. This eliminates the need for your recipient to wait until the year-end to receive the intended gift, providing them with timely support and avoiding any potential delays.

3. To minimize the last-minute rush experienced towards the end of the year

Custodians frequently encounter a surge of requests for Required Minimum Distributions (RMDs) towards the close of the calendar year, potentially resulting in processing backlogs. Failure by your custodian to issue your RMD due to oversight or delays could lead to logistical complications, and you may be subjected to a 10% penalty for not fulfilling the RMD requirement within the specified calendar year. By initiating your RMD request earlier in the year, you can proactively evade this rush and allocate ample time for rectifying any inadvertent processing errors.

4. To alleviate potential complications for your beneficiaries

In the unfortunate event of an unexpected demise during the year, failure to fulfill your Required Minimum Distribution (RMD) obligations will burden your beneficiaries with the responsibility of managing the distribution process. This additional responsibility, coupled with the grieving process, can prove to be challenging. Moreover, the RMD itself will contribute to an increase in their income tax liability for the respective year. Furthermore, if your passing occurs later in the year, there may be insufficient time to establish an inherited IRA and initiate the RMD, potentially leading to further complications and IRS penalties for your loved ones.

5. To optimize the process of a rollover or Roth conversion

If your intention is to proceed with a rollover or Roth conversion within the year, it is advisable to prioritize requesting your Required Minimum Distribution (RMD) beforehand. This is because the IRS designates the initial withdrawal of the year as your RMD, and delaying this withdrawal until later in the year could potentially hinder the smooth execution of establishing a rollover account or completing the Roth conversion process.